The Pension Savings Dilemma For Young Workers


The problem for most people on an average wage is they cannot afford to live now and put away enough money for retirement.

Saving is almost a vice – you know you want to, but you try hard to resist the temptation.

The question is always how much do I must I save, or put another way, what’s the least I can get away with to leave some cash in the bank now?

Financial firms queuing up to manage savings, pensions and investments churn out reports attempting to tell savers how much they need to invest for the future, but the results seem unattainable.

The average annual retirement income for a ‘comfortable’ lifestyle is reckoned to be around £26,000 a year.

How much pension cash do you need?

But the definition od comfortable depends on the individual and what they expect from their retirement.

The other unknown variable is how long a saver will live. The average is around 84 years old, but the problem with an average is some will live a lot less, while others will live a lot longer.

Then there’s what people need to buy now.

A home needs furnishing and maintaining, families need to feed, clothe and entertain children and that two weeks in the sun can cost a family a pretty penny.

So how much money does someone need to save to generate a pension income of £26,000 a year?

First, take away the state pension, which is currently £8,500 a year. That leaves a £17,500 year target.

Crunching the numbers

Assuming a conservative investment return of 3% a year  after inflation, the pension fund needed to provide £17,500 a year is around £325,000.

The complicated bit is working how much cash a saver needs to put in against employer contributions and tax relief. Online calculators help here – and the figures below come from Nutmeg.

For someone aged 25, the level of saving needed for a pension pot of £325,000 is £706 a month, rising to £1037 a month for a saver aged 40 with no current pension pot.

A saver aged 50 would need to contribute £1,569 a month.

However, the average UK salary is £27,200 a year – and for a 25 year old, putting aside £706 a month means losing almost a third of income.

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