New analysis from Royal London
New research by mutual insurer Royal London has found that the pension pot needed to avoid an uncomfortable retirement – dubbed the ‘pension mountain’ – has grown in size in real terms by three quarters since 2002 from around £150,000 to £260,000. More worryingly still, falling levels of home ownership mean that younger generations who end up having to pay rent in retirement could need a total pot as high as £445,000 to avoid a slump in living standards when they stop work.
Royal London’s new policy paper – ‘Will we ever summit the Pensions Mountain?’ – seeks to answer the most frequently asked question in pensions – how much do I need to save for my retirement? It looks at an average earner on just under £27,000 per year and assumes that they draw a full state pension of just over £8,500 per year. It assumes that retirement will bring some cost savings such as no longer having to pay a mortgage, no longer having to contribute into a pension and no work-related costs such as season tickets etc., and therefore suggests that workers who can retire on two thirds of their pre-retirement wage will see no fall in their standard of living when they stop work. This means a private pension income of just over £9,000 is needed in addition to the state pension.
Back in 2002/03, when interest rates were much higher and life expectancy was lower, a pension pot of around £150,000 would have delivered a private pension at this level through retirement. But as the chart below shows, the pension mountain has grown since then to stand at roughly £260,000 today.