Here's how to double your state pension

The state pension pays just £8,546 a year, here’s how you can double that

The basic state pension is exactly that—basic. If this is your only income in retirement you will have a very rudimentary lifestyle.
The new state pension is worth £164.35 per week, or £8,546 a year—that’s just under £23.50 a day. And, you will only get that if you have made 35 years of qualifying National Insurance contributions, otherwise you get less.

Even the full amount is well below the average national full-time salary of £539 a week, or £28,028 a year. It means that you will face a sharp drop in income when you retire, unless you have other pension and savings. The message is simple: save all you can.

 

How much should I save?

The problem is that people don’t know how much they need in their retirement pot, or how much income that will give them. Let's say you have £100,000 at retirement after combining all your company and personal pensions, and other savings such as tax-free ISAs. If you used that to buy a single life annuity it would pay £5,420 a year at age 65, which isn't exactly riches. If you wanted that annuity to pay 50 per cent income to your spouse or partner if you die first, the income will drop to £4,889.

Low rates

Yes, the figures are disappointing. It's not much of a return for £100,000. Low interest rates have hammered the returns on annuities, although rates are finally starting to pick up. Most now prefer to leave their money invested to benefit from stock market growth, and draw down income as they need it. However, annuity rates remain a useful benchmark.

 

Doing the maths

So if you have £100,000 in your pension and bought a single life annuity at age 65, when added to your basic state pension you would have total annual income of £13,966. With £200,000 in your pot, your annual income would rise to £19,386. With £300,000, it would total £24,806. This means you would need more than £350,000 in your pot to come close to the basic average national salary.

 

Start young

The next question is how much you need set invest for each £100,000 by age 65. The answer partly depends on your age.
At age 20, you will have to invest £50 a month, assuming your investments grow at an average 6 per cent a year after charges. If you start at age 30 that rises to £90, according to advisers Chase de Vere, then £165 at age 40 and £355 at 50. Your early contributions work hardest, because they have so much longer to benefit from compound growth.

 

Act now

If you belong to a company pension scheme, you have a head start. Most employers will contribute to a scheme, provided you make matching contributions yourself, and you get tax relief on top.
If you opt out, you are turning down free money.
You can also save into a personal pension, and get tax relief on your contributions, turbocharging their value.
You could combine this with a tax-free ISA. Currently, you can save up to £20,000 and take all your returns absolutely free of tax.
Ultimately, how much you should pay into a pension is simple: as much as you can genuinely afford.