Could you afford to live on a £100,000 pension pot and a state pension?

One in ten people believe they could live on a pension pot worth up to £100,000 but more than half have no idea how much they will need in retirement, new research reveals.

A £100,000 retirement fund would currently buy a guaranteed lifetime income worth around £8,000 a year, or about £667 a month, if you are a healthy 65-year-old. 

But an annuity paying that amount wouldn't rise in line with inflation or provide death benefits for a spouse who outlived you.

Some 7 per cent of those aged 18 to 66 polled by Aviva reckoned they would need to save £1million-plus to pay for the life they want in retirement. 

Aviva says how much someone needs depends on their circumstances, including the age they retire, the lifestyle they would like, and their other sources of retirement income such as the state pension – currently worth around £12,500 a year – and savings.

Alistair McQueen, head of savings and retirement at the firm, says: 'A hundred thousand pounds 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.'

Pension pot: Have you worked out a target for how much you need to save - see below for tips

Some 10 per cent of those asked thought they would need £100,000-£250,00 in retirement, while 7 per cent said £250,000-£500,000 and 8 per cent estimated £500,000-£1million. 

Some 55 per cent admitted they didn't know.

Aviva also found that 54 per cent of pension savers have two or more pots, 62 per cent have gaps in pension contributions, and 56 per cent are worried they won't have enough for an adequate retirement. 

Half of adults say they have little or no understanding of annuities.

Aviva surveyed nearly 4,000 people who are 'household financial decision-makers' aged 18-66 and not yet retired, including 260 self-employed people but excluding those who only have a final salary pension. 

Other than that, the poll was weighted to be nationally representative on age, gender, region, ethnicity, working status and personal income.

How will YOU fund retirement?

You can buy an annuity, which provides an income for life, or for a fixed period such as up until your state pension starts.

You can get annuity extras like a guarantee in case you die soon after purchase, inflation-linked annual increases, and benefits for a surviving spouse – but they will cost more.

Many people invest their pension and live on the income in retirement, or do so at the start and then buy an annuity later, when rates are often better.

If your pension is invested successfully it can keep pace with withdrawals or even keep growing, although it comes with the risks of making losses early in retirement – which are more damaging at the outset than if they happen later on – and that you will run out of money.

The Government is currently consulting on reforms which would see private sector workers enrolled by default into a pension that is guaranteed to last throughout their old age.

The details still need to be thrashed out and the plan is not likely to be introduced for several years.

Final salary or career average pensions are available if you work in the public sector, and they provide a lifetime income and benefits for spouses.

The state pension is another important element of retirement income that is guaranteed for life if you pay enough National Insurance during your working life. 

It is currently worth £241.30 a week or nearly £12,550 a year if you qualify for the full new rate. Payments will rise to £250.70 a week and top £13,000 annually from next spring. You can get a state pension forecast here.

Five questions to ask yourself about retirement

Aviva has compiled the 'reality check' below if you are unsure about whether you are on course for a decent retirement.

Alistair McQueen says: '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.'

1. How much income might you need?

Think about the life you would like in retirement and what it could cost. Compare that with the income you may be on track to receive.

2. Do you understand your retirement income options?

Options can include taking cash, drawing an income from an invested pension or buying an annuity.

3. What could your pension pot provide as income?

Check the latest value and retirement projection from each of your pension providers. Also look at your state pension forecast, as your workplace or private pensions may be only part of your overall retirement income.

4. Do you know where all your pensions are?

If you have changed jobs, check the pensions you have built up along the way.

5. Have work or contribution gaps affected your plans?

A new job, career break or change in income can be a useful prompt to review your pension, including your own payments and any employer contribution.

How much do you need for a comfortable retirement?

A single person should aim for an income of £32,700 a year and a couple £45,400 for a decent retirement, according to a widely used benchmark from trade group Pensions UK.

This ‘moderate’ lifestyle covers the essentials plus some splashing out on food and entertainment, trips abroad and running a car.

If you aspire to an affluent retirement, including long weekends away in the UK as well as overseas holidays, and more spending on eating out and social activities, Pensions UK suggests a single person targets a £45,400 income and a couple £62,700.

For a more frugal retirement, covering essential bills plus a few treats, it estimates a single person needs £13,900 a year and a couple £22,500.

These headline targets don’t include housing costs if you are still paying a mortgage or rent, income tax or care costs in later life.

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