£20,800 a year is a ‘moderate’ pension income – so how much do you need to generate it?

The State Pension won’t even cover half of that amount. To avoid spending your retirement in poverty, you need to top it up with income from your own workplace and personal pensions, and tax-free Isas. So how much do you need to save?

Most people have no idea exactly how much income they need in retirement.

The UK Retirement Living Standards survey aims to help, by showing what level of lifestyle different income levels will buy you.

As we reported last month, to enjoy the bare minimum retirement living standard in 2021, a single person needs £10,900 a year, while a couple needs £16,700.

That is the absolute basic, though, and ideally people should be aiming for more than that.

To enjoy a “moderate” standard of living, a single person needs £20,800 a year, rising to £36,000 for a couple, the survey said.

This would give retirees around £100 a month for eating out and takeaways, £750 a year for clothing and footwear, a Netflix subscription, a Samsung Galaxy mobile and an annual 10-day Spanish holiday.

To go a step further and enjoy a “comfortable life”, a single pensioner needs income of £33,600 a year, while a couple will need £49,700.

The research was carried out by Loughborough University for the Pensions and Lifetime Savings Association before the recent cost of living spike, so ideally you should budget for more.

The big question that Loughborough does not answer is this: how big a nest egg do you need to generate that moderate £20,900 a year?

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If you retired after April 5, 2016, the new basic State Pension currently gives you £9,339 a year, assuming you qualify for the maximum amount.

Subtracting that from £20,900 means that you would only need to generate a further £11,561 a year from your own personal and workplace savings.

That makes it easier to hit that moderate standard of living target.

A long-standing rule of thumb used by financial advisers can be used to calculate how much pension you need to hit that £11,561 target.

This is called the “four percent rule”, and states that if you leave your money invested in retirement and draw four percent as income each year, it should never run out.

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Using this rule, a single pensioner would need a pot of £289,025 to generate income of £20,000 a year.

That’s pretty hefty, even after taking company pensions into account.

Couples who both qualify for the full new basic State Pension would need to generate a further £17,322 a year from their own savings.

They would need pensions and other savings worth £466,950 to deliver a moderate standard of living.

You could generate a moderate income with a smaller pot, but only if you eat into your capital by withdrawing more than four percent a year.

Becky O’Connor, head of pensions and investments at Interactive Investor, said everyone should check how well their pension is growing, plus any tax-free Isas. “Then invest all you can each month to make up any shortfall.”

Saving enough for retirement is never easy, but at least now you have a target to aim at.

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