Those planning their retirement should try and plan for an income of at least £15,000 a year, according to an industry report.Once people reach that income level, they begin to feel more comfortable and more financially secure. But there is no happiness benefit when retirees earn more than £40,000 a year, said the National Employment Savings Trust (Nest). However other experts recommended a “fixed percentage” method of planning. The report found that wellbeing jumps significantly once retirees earn between £15,000 and £20,000 a year, including their state pension. While 43% of people in that category felt financially comfortable, just 24% felt comfortable when earning less than £15,000. Many people earning less than that find it difficult to afford energy bills and groceries, said the Nest report. The £15,000 contentment threshold applies however many people there are in the household. Increased contributions The research will help to give people a more accurate idea of how much they need to save for retirement on top of their state pensions, a key idea behind the government’s pension reforms. The state pension is expected to be worth at least £7,500 a year when it comes in in April 2016.
On that basis a 22 year-old earning £20,600 a year would only need to make the minimum pension contribution to get close to the £15,000 threshold, by the state retirement age.With a 4% employee contribution into his or her pension, and a 3% employer contribution, that person could expect a total income of £14,260. However a thirty year-old starting payments on the same salary could expect to receive much less – £11,790 – including the state pension. A 40 year-old would receive just £10,210, so might need to consider increasing contributions. Replacement rate Nest – a non-profit-making organisation which supplies pensions under automatic enrolment- has also produced some tips for saving into a pension. It claims that if a 30 year-old worker replaced a take-away with a home-cooked meal at least once a week, they could save £12 a week. If all of that was paid into a pension, it could build up to a pot worth more than £50,000. By buying a packed lunch to take to work, people could amass a pension pot of more than £63,000. But other experts believe people might be better off planning for an income which is a fixed percentage of the amount they used to earn while working. In other words, those who earn more while working will need a bigger pension when they stop. The lower someone’s pre-retirement earnings are, the higher proportion of those earnings their pension will need to be in retirement If someone is on a salary of £15,000, they will want a replacement rate of at least 80% Someone on a salary of £30,000 might want a two-thirds replacement rate