A pension pot worth £100,000 could provide an income of just £667 a month in retirement, according to new research from Aviva that highlights how far savings will stretch in later life.
The insurance and pensions provider found that more than one in ten (13%) working age adults believe £100,000 or less would be enough to support them throughout retirement. However, Aviva estimates that £100,000 could currently buy a single life annuity paying around £8,000 a year for a healthy 65-year-old, equivalent to approximately £667 a month.
An annuity provides a guaranteed retirement income, usually for the rest of someone's life, in exchange for some or all of their pension savings. The amount someone receives depends on several factors, including their age, health, prevailing annuity rates and whether they choose additional features such as payments that increase over time.
Concerns over retirement income
Aviva published the findings during Talk Money Week, which ran from November 2 to 6 and encouraged people to take manageable steps towards improving their financial wellbeing. Its research found that 56 per cent of working age adults worry they will not have enough money to maintain an adequate standard of living in retirement.
Nearly three in ten (29%) have either not considered how much income they would need for a comfortable retirement or do not know the amount required. The £8,000 annual estimate is an illustration rather than a guaranteed offer and would be separate from any State Pension entitlement.
Alistair McQueen, Head of Savings and Retirement at Aviva, said: "£100,000 sounds like a lot of money, but retirement can last for decades. That's why it is helpful to think about a pension as the income it will need to provide, rather than the size of the pot as a whole."
He added: "There is no magic number that will be right for everyone. Start with the retirement you want, work out roughly what it might cost and then look at whether what you have saved so far is on track."
Multiple pension pots and gaps
The research also highlighted the difficulties people can face when trying to establish how much they have saved. More than half of pension savers (54%) have two or more pension pots, while 62 per cent reported gaps in employment that could have interrupted their pension contributions.
Career breaks, periods without employment and changes in earnings can all affect the amount someone builds up in workplace or private pensions. Aviva also found that half of adults have little or no understanding of annuities, highlighting the importance of learning about retirement income options before making decisions about pension savings.
Mr McQueen encouraged people to track down pensions from previous jobs and become familiar with the choices available when they stop working. He said: "You do not need to become a pensions expert to get started. Take a look at your pensions, track down any pots from previous jobs and get to know the choices you'll have later in life."
Five steps to plan retirement finances
Aviva has shared five steps people can take to build a clearer picture of their retirement finances. First, estimate how much income you will need by considering the lifestyle you would like in retirement and the regular expenses you expect to face, comparing those costs with the income you are currently on track to receive.
Second, understand your pension income options, including taking cash, withdrawing money gradually from an invested pension or purchasing an annuity, each with different implications for income, flexibility and financial security. Third, check your pension forecasts by reviewing the latest value and projected retirement income for each workplace or private pension, as well as your State Pension forecast.
Fourth, track down pensions from previous jobs by checking old paperwork or contacting previous employers to identify savings that may otherwise be overlooked. Fifth, review gaps in pension contributions, as periods away from work or changes in earnings can affect retirement savings, and use the free MoneyHelper pensions guidance to learn more about planning for retirement.
Aviva stressed that the amount needed for a comfortable retirement will vary depending on individual circumstances, including housing costs, retirement age, other savings and the lifestyle someone hopes to maintain.
