‘Pension mountain’ of £260,000 now needed – Royal London

More worryingly still, falling levels of home ownership mean that younger generations who end up having to pay rent in retirement could need a total pot as high as £445,000 to avoid a slump in living standards when they stop work.

Royal London’s new policy paper – ‘Will we ever summit the Pension Mountain?’ – seeks to answer the most frequently asked question in pensions – how much do I need to save for my retirement? It looks at an average earner on just under £27,000 per year and assumes that they draw a full state pension of just over £8,500 per year.

It assumes that retirement will bring some cost savings such as no longer having to pay a mortgage, no longer having to contribute into a pension and no work-related costs such as season tickets etc., and therefore suggests that workers who can retire on two thirds of their pre-retirement wage will see no fall in their standard of living when they stop work. This means a private pension income of just over £9,000 is needed in addition to the state pension.

Back in 2002/03, when interest rates were much higher and life expectancy was lower, a pension pot of around £150,000 would have delivered a private pension at this level through retirement. But as the chart below shows, the pension mountain has grown since then to stand at roughly £260,000 today.

As well as looking back, the paper also looks forward to an era when fewer people will have become home owners during their working life and more will have to fund a rent out of their retirement income.

For the minority of pensioners who will be renting from a local authority or housing association, this means an extra £125,000 will be needed in pension saving to generate an income sufficient to cover ongoing rent in retirement.

But for the growing number of pensioners renting from a private landlord, higher private rent levels mean a total pot of £445,000 will be required - £185,000 more than for someone who has no rent or mortgage costs in retirement.