Skip to content Skip to footer

How much pension do I need to retire happy?

Pensions. Yaaaawn. Like many others, you likely think pensions are one of the most boring topics in history, ever. And you wouldn’t be alone. For most people, pensions sit in the background for decades slowly growing away…hopefully. It just seems so long away and something you can always think about ‘tomorrow’.

That is until you get closer to retirement age. All of a sudden, your interest in pensions starts to perk up. By that stage, though, there is very little you can actually do. If you suddenly realise you don’t have as much as you thought, or need, it might be too late to make any serious difference to your financial future.

Of course, it doesn’t need to be this way. Spending just a few minutes learning about pensions and working out how much you need can really help you have the retirement of your dreams instead of your nightmares.

In this article, we are going to run through the essentials, how you work out how much you need and how you can plan for a happy, worry-free retirement, while you still have time. And if you’re already close to pension age, we’ve got plenty of ways that can help too. Let’s go.

What is a pension?

A pension is a financial instrument that allows you to save for your retirement. Nowadays, most people have a pension provided by the company they work for.

Workplace pensions come in two forms:

  • Defined Benefit
  • Defined Contribution

For simplicity, the key difference between the two is that with a Defined Benefit pension your employer promises to pay you an agreed income when you reach retirement age. By contrast, a Defined Contribution pension allows you to save a pot of money that you can choose what to do with when you retire.

Defined Benefit pensions are seen as the gold standard as they guarantee an income in retirement, as long as you make the correct contributions while working. Gradually, these pensions have started to fade away as employers look to reduce future financial requirements.

The most common type of pension is Defined Contribution. Under this model, you are responsible for what you do with your pension. This tends to be where people become unstuck.

There is also a personal pension plan called a Self-Invested Personal Pension (SIPP). For the sake of this article, we will treat a SIPP in the same way as a Defined Contribution pension. The main difference is that your employer won’t typically pay into a SIPP.

Heads up – We aim to produce honest and accurate content, however, we are not financial advisors. If you need financial advice, Unbiased can connect you with a suitable professional for free. Some of our links may earn us a small commission to help us run the site.

Why it’s important to start your pension early

The earlier you start planning and building your retirement, the better. The power of compound interest takes time to have an effect on your money and grows stronger as the years and decades pass.

The graphic below shows that by saving £10,000 per year, it takes nearly eight years to hit your first £100,000. However, each subsequent £100,000 gets quicker, resulting in the final £100,000 taking just two and a half years!

Compound investment growth in action – Four Pillar Freedom

This is often referred to as the snowball effect. It starts small, but as it grows it gathers momentum and collects more snow (ie, money) as it goes. The bigger it gets, the more it collects. Eventually, your money is making more than you can actually put in each year (ie, the £40k annual cap).

Of course, whilst the above graphic shows as a theoretical straight line, when it comes to pensions and investments, the ride is never this smooth!

So, starting your financial snowball as early as possible gives your pension more time to grow. Even if you start small, it’s better to make a start. And remember, other than when you were 18, NOW is the next best time to get started.

How much do I need for retirement?

How much you need for retirement depends on the lifestyle you plan to lead. In what ways do you expect your life to change when you finally stop working?

Most retirement planners assume you’ll need less money in retirement than you currently spend each year. However, if you plan to live the life of luxury, cruising the med all year round, then you’re going to need to plan for this.

In addition, most retirement planners and calculators use general principals and while these can be useful, they are not tailored specifically to you.

First off, it’s a good idea to work out how much you currently spend each year. You can do this by trawling through old bank statements, or you could use our Budget like a Pro article to help you easily create a tailored spending and saving plan.

Next, you need to deduct expenses that you won’t have in retirement, such as:

  • Mortgage – will your house be paid off?
  • Kids – will you still be funding your kids, dependents or family members?
  • Work-related costs – commuting, lunches, parking, professional memberships etc.
  • Savings – this is what you’ve been saving for, isn’t it?

Remember to add back in any expenses that you don’t currently have.

  • Additional holidays – planning on spending more time in the sun?
  • Grandchildren – do you want to start helping them?
  • Healthcare – will you have any additional healthcare requirements?

Now, this doesn’t have to be entirely accurate. If you are under 40, then a lot is going to change before retirement age. Use this number as a rough guide. Who knows what we’ll be paying for in 30 years time? Rewind 30 years and we didn’t have mobile phones or internet access, so who knows what could come up in future. The point is, don’t get too hung up on being 100% accurate. The world is going to change.

How much pension do I need?

Now you’ve worked out how much you need each year for retirement, it’s time to turn this into a lump sum.

Before we do that, we need to account for the State Pension.

The State Pension is paid out to all qualifying adults. To receive this, you must have made the necessary national insurance contributions.

If you qualify for the full State Pension, in the financial year 2021/2022 you’d receive £179.60 per week, totalling £9,339.20 per year.

Use this link on the Government website to check your state pension forecast.

There are different opinions around the future of the state pension. Could it be means-tested? Will it payout at the same rate? May it even exist at all? No one knows these answers, so you have to decide for yourself if you want to include the State Pension in your calculations.

If you do want to include the State Pension, then you can deduct an estimated £9,000, or your assumed forecast, from your annual spending.

The next step is to multiply your annual budget (minus the State Pension if you choose) by 25. Why 25? We cover this next…


Get your FREE financial guides, plus useful updates and exclusives to grow your personal wealth.

The 4% rule

A generally accepted rule of thumb for retirement planning is the 4% rule. This assumes that you can safely withdraw 4% of your retirement pot each year without going broke.

Crucially, there are some fundamental assumptions made here to be aware of:

  • Portfolio – the maths behind the rule is based on a study where retirement funds were invested 50% in stocks and 50% in bonds.
  • History – it’s based on historical market returns which may not reflect current or future financial markets, performances or products.
  • Time – it assumes your retirement will last no longer than 30 years. However, the latest predictions are that 25% of use will live to 100.
  • Inflation – the calculations include an increase in spending in line with inflation at 2%. Inflation varies and could be higher.

The 4% rule should be used only as a guide. Your personal circumstances, risk tolerance and future predictions will vary. In fact, many people suggest that today, a far more conservative 3.5% or even 3% should be used for planning. “Hope for the best, plan for the worst”.

The 4% rule states how much you can withdraw, but we want to work out how much we need in our retirement pot based on our budget. To do this, we need to flip the calculation. By multiplying your annual budget by 25 you get the required pot size which you can apply the 4% rule to.

Here’s an example:

If I want £20,000 per annum in retirement, I’d multiply £20,000 by 25, giving me £500,000.

In reverse, 4% of £500,000 is £20,000.

It’s a nice, easy calculation to use as a general rule of thumb.

How much do I need to save for retirement?

Now you have your ‘number’, how on track are you to reaching it by retirement age? Well, working this out is easier than you think. To get started, you’re going to need the following information:

  • Current pension(s) – dig out your old paperwork or log in to your app. You’re going to need to check how much you currently have across all of your pensions.
  • Payslips – check your yours and your employer’s current contributions.

Next, check out this Pension Calculator to help you out:

Retirement calculator

Click to open the calculator

PensionBee Calculator
PensionBee Calculator

To use this calculator, put the total of all your pensions into the ‘current pension pot’ field.

If you have multiple pensions, you may want to consider consolidating them to make your financial future easier to calculate. Consolidating pensions can also help you:

  • Save money – moving to one provider may save fees.
  • Ease – having all your pensions in one place makes them easier to manage.
  • Performance – having control of what you’re financial future is invested in may yield better results.

If you are considering saving money by consolidating your pensions, then check out our review of PensionBee – “easily find and consolidate old pensions for free”.

You can play with the contributions on the calculator to see if you’re on track or if you need to review how much you pay in.

Financial Fitness Guide - get part one FREE!

Subscribe now and get your FREE part one of the Financial Fitness Programme, designed to grow your personal wealth, reduce your money worries and give you more time.

Make the most of employer contributions

Most Defined Contribution pension schemes work on the basis that you will put in some money and your employer will top this up.

Some schemes are more generous than others. For example, your employer may match your pension contributions, up to 10% of your annual salary. This means if you pay in £100, your employer will add another £100, effectively doubling your money immediately.

It’s worth checking if you are getting the most out of your scheme. If you are putting in less than the maximum match your employer will make, then you are effectively leaving free money on the table. Money that, given the tax-relief and ‘snowball effect’ we discussed earlier, could be the difference as to whether you hit your number or not.

That said, many people will feel this reduces their take-home pay. Technically yes, but your pension is the single most effective and efficient way of saving for your future.

People in this position should strongly consider where they can make savings elsewhere in their spending, to be able to increase their pension contributions. Even doing this by just 1% each year until you reach your employers’ maximum contribution, will make an incredible difference.

The £50 a month you save on takeaways now, after employer contributions, tax-relief and compounding over decades, could be worth tens of thousands of pounds by the time you retire.

Pensions aren’t the only way to save

If you’re saving for retirement, it’s not only pensions that can help.

You won’t pay tax on the money you put into your pension plan, but you’ll probably end up paying some tax when you take it out. This is because pension withdrawals are treated as income.

Under current rules, you can withdraw up to 25% of your total pension pot tax-free, but after this amount, you’ll need to pay income tax if you qualify.

If your income exceeds the current tax-free allowance of £12,500 (20/21), then you will qualify and need to pay income tax.

Alternatively, a Lifetime ISA (LISA) allows you to gain some of the tax advantages but without having to pay income tax. There are caveats here, so to learn more, check out our Lifetime ISA guide.

Of course, you can still use all the regular ISAs and savings accounts alongside a LISA. So, make sure you take these into account when considering the size of your pension pot. If you want a LISA, ISA and savings account all in one place, then you may like Hargreaves Lansdown Active Savings which puts all these accounts into a single platform.

FREE Financial Independence Guide!

Subscribe now and get your FREE Financial Independence Guide. Includes everything you needed to know about building your financial freedom.

Pensions lifetime allowance

It’s important to point out that there is currently a maximum amount you can save into a pension before tax becomes a problem.

Your pension can grow up to a touch over £1 million. Go above this and there’s going to be some tax to pay. Keeping below it can save you thousands over the course of your retirement.

For context though, that’s a figure most of us won’t have a problem with.

However, some people will. If you have pensions in multiple places, it can be difficult to see how close you are to this, so you may want to check out the next section.

If you think you are going to get close to this limit, it’s best to plan ahead and prepare your finances accordingly.

I love doing my finances myself, but this is something I would use a professional for. You can find a local, professional Independent Financial Advisor for free through Unbiased. Handily, they will usually do a review for free. I personally think it’s best to take one-off advice rather than moving your investments under management, as this is usually much more expensive in the long run.

Make retirement planning easier

If you have worked for different companies over the years, you probably have money spread across different pension providers. You may not even know where all your pension pots are.

We’ve found an award-winning service from PensionBee that can find and consolidate all your old pensions into one. This makes planning for your retirement much easier by putting all your pensions in one place. It could also save you money.

Our PensionBee Review runs through the ins and outs so you can decide if it’s for you. We were impressed by the platform and service, plus the reviews are great.

PensionBee Review Trustpilot

Need more help?

“A problem shared is a problem halved”, as they say. If you don’t have anyone to chat about money with, then join our Facebook UK Personal Finance Club. It’s full of like-minded individuals all looking to improve their financial fitness through mutual support and sharing knowledge.

Getting your finances in shape can help you reduce the amount of money you spend and increase your savings. This can help you build long term wealth and even retire early. We’ve created a Financial Fitness Programme to help you on your way. Subscribers can get the first phase for free, as well as a guide to Financial Independence, we hope you’ll enjoy them.

When planning your retirement, professional advice is always recommended. If you want a pension health check then it’s worth heading over to Unbiased. It’s a service designed to connect you with a financial professional based on your requirements. A lot of the advisors will offer a pension health check for free.

If you’ve not heard of Unbiased, we’ve written a review here to help you out.

Pensions - so, do you have enough?

Planning for your retirement may feel boring or something you can put off until tomorrow, but spending a few minutes on some rough calculations now can make all the difference. If you run the numbers and they’re not sticking up, knowing this as soon as possible gives you more to rectify and change course.

Retirement planning doesn’t have to be complex and burying your head in the sand isn’t going to help. So, get started, use some of the tools we have provided and cut that worry by building a solid plan for your happy retirement.

Here’s to Financial Fitness does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. If you need financial advice Unbiased can connect you with a suitable professional for free. Investments may go up as well as down and you may get back less than you put in.