How to grow a £25k-a-year pension as Labour eyes scrapping triple lock

The possibility of a government removing the state pension triple lock is one of the most contentious topics in modern UK politics, and yet it’s almost certainly a decision which needs to be taken as the cost of upholding it spiral.

The state pension is estimated to cost upwards of £15bn a year by 2030, according to the OBR, which over the long term will be an unsustainable percentage of government spending overall.

Leaving aside the question of what the money will be spent on instead, it’s worth individuals taking their retirement savings into their own hands at the earliest opportunity.

There’s no predicting how much the state pension will be worth decades down the line, but you absolutely can ensure your retirement savings are ready for when you’re ready to wind down.

Here’s how you grow enough of a retirement pot to give you £25,000 a year.

How much is a full state pension and how much do you need in retirement?

Right now, a full state pension in the UK is worth a little over £12,500 a year. That’s set to go up by almost £500 annually next year, to in excess of £13,000.

But according to the Retirement Living Standards (RLS) organisation, a single person household needs £13,900 a year to fund a minimum lifestyle, which covers basic needs and a domestic holiday, eating out once a month and the odd leisure activity with friends.

If you’re after a moderate lifestyle, including an overseas holiday, a weekend break and more flexibility for discretionary spending, that figure rises to £62,700 a year for a couple and a comfortable retirement.

If you’re living as a pair you can begin to plan for how much you’ll need - though it’s not quite as simple as choosing an amount per year and multiplying it by the number of years you hope to live for.

How to calculate the total retirement pot you think you’ll need

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Using an example of someone aiming for a £25,000 a year retirement income – between minimum and moderate lifestyles for a singleton, or contributing to moderate-to-comfortable as part of a two-person household on equal amounts.

While we can’t predict what the state pension will be years from now, if we assume it is fixed at at least £10,000 a year, that leaves £15,000 more a year which needs to come from private pensions, such as a workplace pension and any SIPPs or managed pensions you hold.

To work out the total to aim for, we can use what’s known as the 4 per cent pension rule: this is a long-established formula which shows you how to safely withdraw 4 per cent of your pension pot each year in your retirement and make sure you don’t run out for at least 30 years.

To do that, we divide the required annual withdrawal (£15,000) by the withdrawal rate (4 per cent as a decimal is 0.04), which is £375,000.

That would be the total pot needed for a £25,000 annual retirement income including £10,000 from a state pension – now you can can adapt that formula to your own situation and work out what you might need. For example, if the above person had zero state pension coming, they’d need (25,000 divided by 0.04) £625,000 in retirement savings.

How to build a £25,000 a year retirement pot

The sooner you start, the longer time your money has to compound and grow even further.

Let’s assume our example is of a 50-year-old person intending to retire at 67 but this person only has £40,000 in their retirement pot right now and is starting to worry they won’t have enough to hit their £375,000 target.

With 17 years left before they retire, almost two decades is still a lot of compounding time - and remember, pension contributions benefit from tax relief.

Paying in £598 a month would give a total contribution of almost £750, once 20 per cent relief is factored in and assuming they are a basic-rate taxpayer.

Adding that each year to the existing pension and with the entire pot continuing to earn a steady 6 per cent, the person would hit a little over £376,000 at age 66.

Now, investments aren’t really that steady, they’ll earn more or less, there are fees to consider and inflation, plus pension investments are often geared to be less-risky (and thus earn less) the closer a person gets to retirement age. But the same person may also have fewer expenses the older they get as houses are paid off or children leave home, allowing a greater contribution to go towards retirement.

Pension pot must-knows

If you are employed, check if your company operates a scheme where they will match your pension contributions. They should usually pay in 3 per cent automatically, but if they match your 5 per cent that is effectively free money for you going towards your retirement.

If you are a higher-rate or additional-rate taxpayer, you can claim further relief on your contributions but this isn’t done automatically. You need to tell HMRC about this, often by way of a tax return.

And, as we approach Andy Burnham’s first Budget mindful of last year, for those approaching retirement age it’s vital to not rush into making lump-sum withdrawals from their pensions in a panic about what might be announced, without properly working through their financial plan based on fact.