Pension: IFoA rules of thumb explain whether you’re saving enough

What sort of retirement are you set for? This formula can give you a decent idea.

Are you saving enough for your retirement?

A new calculation from the Institute and Faculty of Actuaries (IFoA) can help you work out whether you’re on track, or need to raise your saving game.

Last year the IFoA set out a series of rules of thumb that people could use to help work out how much they need to save over their working life in order to achieve a certain standard of living once they hit retirement. 

These then marry up with definitions of retirement living standards set out by the Pensions and Lifetime Savings Association (PLSA): ‘minimum’, ‘moderate’ and ‘comfortable’.

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What kind of retirement do you want?

Here’s what those definitions mean ‒ and what you’d need to save in order to enjoy them.

Minimum

The minimum living standard covers all basic needs, and then some money left over to cover for fun, whether that’s going out with friends or attending social occasions.

According to the PLSA, this would be enough to cover holidays in the UK, eating out once a month, and enjoying some simple leisure activities around twice a week.

This would equate to around £10,200 per year for a single person and £15,700 for a couple.

Under the rule of thumb from the IFoA, this is achievable through the combination of the State Pension and saving at the current 8% minimum contribution level for workplace pensions.

Moderate

A moderate lifestyle offers added financial security and more flexibility.

In the examples given by the PLSA, this could include a two-week holiday in Europe and eat out a few times a month, as well as “have the opportunity to do more of the things they want to do”.

This is calculated as requiring £20,200 a year for single people and £29,100 for couples.

The rule of thumb from the IFoA is that this is achievable based on monthly pension savings coming to around a quarter of average full-time savings.

This is worked out at being around £800 a month, and while that sounds a scarily large amount, remember that this is per household and that it includes contributions from employers as a result of workplace pensions.

Comfortable

Finally, there’s the comfortable level of retirement living, which the PLSA suggests you will enjoy regular luxuries (beauty treatments and the like), theatre trips and three weeks in Europe each year.

This is likely to require a pension pot of around £33,000 a year for single people, or £47,500 for couples according to the PLSA.

And the IFoA ‘rule of thumb’ says that in order to build a sufficient pot, you’ll need to save double what you’d put away if aiming for moderate.

Again, that’s a big old hunk of cash, but at least some of it will be coming from your bosses.

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Staying on track

The IFoA has now published an additional rule of thumb to help pension savers build the right size pot for their retirement, looking at the risk of staying on track with your saving.

That’s because the current generation of savers, who are reliant on defined contribution pension, face a number of challenges that can impact their ability to put a sufficient amount aside, such as the uncertainty over investment returns and whether people can actually put aside a sufficient amount.

The rule of thumb works like this.

The saver subtracts 22 from their current age and then multiplies this by the monthly amount set out for their savings goal. They then multiply this amount by 12 to give them the target fund needed to provide the living standard they want.

Let’s take an example. I’m 36 and want to enjoy a ‘moderate’ income in retirement.

So I would subtract 22 from my age (14) and then multiply that by the £800 a month needed for that category. I then multiply that by 12 to give me a target fund of £134,400.

Ouch.

It’s time to make a change

Of course, the idea of this rule of thumb isn’t to depress people into giving up on pensions entirely (though that may, understandably, be your first reaction).

Instead, it is to give you an idea of whether you need to make some changes to your pension saving habits. As the IFoA explains, there are some options here, such as:

• Changing the size of your contributions
• Adjusting your expectations about retirement income
• Anticipate retiring later than planned
• Consider alternative sources of retirement income (for example from your property)

Obviously, the younger you are, the easier it will be to make certain changes that could affect the size of your eventual pension pot.

There aren’t many changes I can make which will beef up my own pot by the amount the IFoA reckons I’ll need short of winning the lottery (which will be particularly difficult when I don’t play it) but that doesn’t mean their calculations are wrong.

It just means I may have to get used to the idea of a ‘minimum’ living standard when I eventually pack up work.