For too many people, pensions are shrouded in mystery. Most of us don't know the answer to two basic questions: how much pension do you need to generate a decent income at retirement, and how much do you need to save to achieve that? I'm going to give it my best shot at supplying clear answers.

How much is enough?

First, you have to decide how much income you would like in retirement. As a guide, £15,000 a year should be your minimum target. Pensioners start to feel more comfortable and financially secure once they earn between £15,000 and £20,000 a year, according to research from the National Employment Savings Trust (Nest). (Link 1, below)

If you want more, you will have to save harder.

 

Reaching £15,000 with a state pension

If you're aiming for £15,000, the good news is you're halfway there. The proposed flat-rate state pension, which comes into force in April 2016, should be worth around £7,500 a yearTo get the full amount, you will need to have made 35 'qualifying' years of National Insurance contributions.

Saving enough to generate the remaining £7,500 of annual income may be harder than you think. Currently, you need £125,000 in your pension pot to generate income of £7,500 at age 65 from a single life annuity, according to figures supplied to me from IFAs Chase de Vere.

Given that the average pension pot at retirement is currently £30,000, most people fall well short. As if that wasn't hard enough, if you want your £7,500 a year to rise in line with inflation, you will need a pension pot of around £242,000. On a more positive note, when interest rates finally start rising from today's all-time lows, you should be able to generate more income from your pension.

 

Age VS how much to start saving

How much you need to save each month to achieve your target depends on personal factors such as how old you are now, when you plan to retire, and how much you already have saved.

At age 35, you would need to save £125 a month for each £100,000 of pension pot you would like by age 65This assumes average annual investment growth of 5% a year, after charges.

At age 45, would have to save nearly £250 a month for each £100,000 of pension. If you don't start saving until age 55, you would need to save around £625 a month.

Starting early really does help

Your early contributions are by far the most valuable, because they have much longer to grow, year after year. If you belong to a workplace pension, your employer should also contribute to your pension contributions, so you don't have to find all that money from your own pocket.

You can also claim tax relief on your pension contributions, turbo-charging your savings.

If all that sounds too complicated, there is a simpler pensions rule to follow: save as much as you can, as early as you can.

Read more articles by Harvey Jones here

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