This can feel like a big question with lots of unknown unknowns. Since your pension is basically your salary for ‘future you’, the simplest way to figure out how much you’ll need is to ask yourself  ‘what income do I want in retirement?’

The first thing to remember is that at State Pension Age, you’ll get the State Pension of around £10,600 a year. This is the maximum amount you can receive in 2023-2024, but this number may change in the future in line with inflation. You’ll only be eligible for the maximum State Pension payments if you’ve been paying National Insurance contributions for at least  35 years. 

How much money do I need for retirement?

Think about the lifestyle you want. 

We can generally break this down into 3 types*:

• Minimum lifestyle – £14,000 (for singles), £20,000 (for couples). 

This is the minimum you’d need to provide a basic retirement, enjoying the occasional meal out and modest holidays each year, possibly only in the UK. 

• Moderate lifestyle – £24,000 (for singles), £34,000 (for couples)

This is enough to enjoy regular meal outs and holidays each year. You’d also be able to afford running a car and minor house renovations.

• Comfortable lifestyle – £38,000 (for singles) £54,500 (for couples)

With this you’d be able to enjoy holidays abroad, eating out regularly, replacing your car every 3 years, and the ability to make major house renovations. 

Once you have your State Pension forecast and an idea of the kind of lifestyle you want, you can check if you’re on track to achieve your dream lifestyle, or if you’ll need to make up the difference. This can be done through a combination of different assets, like your workplace pension, a personal pension, and some investments. 

* These numbers are based on those from the Retirement Living Standards by the Pensions and Lifetime Savings Association. They can change every year based on inflation.

What’s the ‘half your age’ pension rule?

The traditional basic rule is that when you first start paying into your pension, the percentage you contribute should be half your age. This number includes the combined employee and employer contributions. 

For example, using this ‘rule’ a 20 year old earning £20,000 a year would make 10% pension contributions. These contributions will build a pot that provides an income of around £6,000 a year from their pension. This would put them between the Minimum and Moderate lifestyles (once the State Pension is included).

If they earned £40,000 a year and paid the same contributions, they would have an income of around £18,000 a year from their pension, putting them between a Moderate and Comfortable lifestyle (once the State Pension is included). 

If they delayed starting to contribute to their pension until age 40, the income from their pension in retirement would fall by around 30% (£4,000 on a salary of £20,000 and £12,000 on a salary of £40,000).

The ‘save half your age’ pension rule isn’t a hard and fast rule, but can be really useful as a starting point. If you start paying into your pension early, you don’t actually have to increase this percentage as you get older. That’s part of the benefit of starting sooner rather than later and using this guideline. 

Most pension providers have a pension calculator on their website. You can use this to work out how much you need to contribute to achieve your desired retirement income.

Different pension calculators use different assumptions to make their calculations, so you might find small differences in the long-term projections. But you’ll still get a good general idea of how much you’ll have in retirement. 

When working out how much you’ll need, remember that generally you’ll no longer be paying off your mortgage or saving.