The focus on pensions has ramped up over recent weeks following reports that the State Pension age could be rising to 68 earlier than planned, effectively meaning that everyone currently aged 54 and under will need to work longer. People with private or workplace pensions will also have to wait until they are 57 to access retirement savings due to changes coming into effect in 2028.
Pensions, savings and retirement are frequent topics on The Martin Lewis Money Show Live and this week the consumer champion shared a very quick way to work out how much you should be saving each year to make sure your pension pot is brimming over in later life. While his method is just a ‘rule of thumb’ it’s a good benchmark for those who haven’t started saving yet, or are swithering about opting out of auto-enrolment.
Martin explained that all you have to do is take your age, halve it and that is the percentage of your annual income you should be putting into your pension every year until you retire.
An example of this is someone who is 30 would need to save 15 per cent of their annual income every year. If they earned £30,000, they would need to put away £4,500 each year, the equivalent of £375 each month.
Martin told viewers most people don’t do that, but you have to take into account your workplace pension and the contribution towards your pension made by your employer.
You can catch up with The Martin Lewis Money Show Live on the STV Player.
Calculating your retirement income
A new inflation calculator, designed and launched by leading online pension provider, PensionBee, can also help people calculate how much their savings could be worth in retirement.
Savers can input their current pension pot value, apply an annual rate of inflation and a static yearly contribution amount to discover how much their pension could be worth (assuming a 5% investment growth and other assumptions) at retirement.
Without the effect of inflation, the calculator estimates that a pension pot currently worth £50,000 could equate to £94,023 by 2033, assuming 5% investment growth and £1,000 in contributions each year. However, the net effect of an assumed 2.5% rate of inflation means it could actually be worth just £75,208 in today’s money.
As an example, to maintain the purchasing power of £94,023 in today’s terms, a saver would need to grow the overall value of their pension pot by £18,815 over the next 10 years to offset the effect of inflation through either additional contributions or further investment growth.
To illustrate how much the continuation of the current inflation rate (10.5%) could erode a pension pot over time, the calculator reveals that by 2033, a £50,000 pension pot today could be worth £33,988 in today’s money, taking into the account the same assumptions regarding investment growth and annual contributions as above.
The calculator also indicates how the price of everyday goods could rise in the future due to inflation. It shows the average pint of beer (£4.13) could be £61.20 by 2050 if inflation were to remain at 10.5% each year, however this is highly unlikely.
Becky O’Connor, Director of Public Affairs, said: “Pensions are a great way of saving for the future, however, they are not immune from the effects of inflation. While pensions usually grow at a faster rate, inflation still has the power to erode the value of a pension pot over time, as they must stretch further to afford everyday goods and services.
"As record high inflation levels are most noticeable when considering large sums of money, our new tool aims to take the guesswork out of retirement planning, helping savers navigate the impact of inflation on their pension pot. By arming savers with the necessary information and knowledge, we hope to encourage adequate future planning so everyone can look forward to a happy retirement."
She added: "As always, I would urge all savers to continue making contributions to their pension where and when they can to help offset the impact of inflation to ensure their pension can last for as long as possible in retirement.”
You can try the inflation calculator here.
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