How to save for retirement

Retirement is your reward for the years of hard work you’ve put into your career. But to fully enjoy these golden years, it’s essential that you’re slowly but surely building up a retirement pot that can provide you with income when you’re not working.

When you’ve got bills and other financial commitments, finding enough spare money to grow your pot isn’t always easy. However, it’s still possible. And the sooner you start, the more you’ll benefit from it in the long run.

Don’t worry, we’re here to answer all your burning questions and help you start building your savings for retirement.

Saving for retirement: considerations

When you’re saving for retirement, there are a number of things to think about:

Lifestyle and income

Thinking about how much income you’ll need to enjoy your golden years is fairly personal to you. Especially as everyone has a different idea of how they may want to live their life when they’ve finished working.

A good place to start is by looking at the type of lifestyle you want to lead and how much yearly income you’ll need to fund it.

Do you envision yourself taking multiple holidays throughout the year or are you more of a staycation type of person? Do you see a car in your future, and, if so, how often do you think you’d like to switch to a new one? Are you planning to make any drastic changes to your home or even move in the future? These are all the types of questions to consider when envisioning your lifestyle in retirement.

The Pensions and Lifetime Savings Association (PLSA) has calculated that there are three Retirement Living Standards that you might want to keep in mind:

• Essential — designed to cover all your basic needs and necessities.
• Secure — offers financial stability and a bit of flexibility.
• Enjoyable — provides you with greater financial freedom and the chance to indulge in some luxuries.

Each Living Standard has an estimated amount of money required to attain this type of lifestyle for both single people and couples. We recommend visiting the website linked above to get a full breakdown of what’s included and how much you need.

Retirement age

While the state pension age is expected to hit 67 for both men and women by 2028 (Gov.uk), this might not be the right point in your working life for your retirement plan. Some people choose to retire earlier or later than the state pension age. You just need to give some thought to this as it will impact the level of retirement savings required.

Obviously, choosing early retirement means that you’ll need a larger pot to draw from as you may be without work and so a regular salary for more years. The reverse is also true, in that the longer you choose to work, the smaller your required minimum retirement pot may be.

Deciding when to start your retirement will help you plan the number of working years you have left and adjust any workplace or private pension plans accordingly. This way, you can calculate how much to put away each month.

Investment style

Investing can be low risk, high risk or anywhere in between. This means that there can be smaller or greater potential for you to lose your money, but is often balanced by the chance to make higher returns. It’s up to you what level of risk you’re prepared to take, but do keep in mind that it’s your retirement future that will be on the line.

With this in mind, consider how much appetite for risk you have. Savings accounts are on the lower risk side, but at the same time, more likely to pay lower returns, and cash is zero risk but its value could be reduced because of inflation. On the other hand, investing in stocks, shares and equity funds has the potential to earn you more, but there is a risk of losing value if they don’t perform well.

You may also wish to think about your preferred level of risk when it comes to any pension fund. Many pension funds are invested in a variety of assets to help them grow in value. Most providers have a few tiers to choose from where investments are made to match whatever level of risk you want to take, from low risk to higher risk. Again, think about this carefully as you could see the value of your fund drop.

Talking to a financial advisor can be useful to help you understand all your investment options and the risks they carry.

How much do I need to retire?

As we mentioned earlier, the amount of money you’ll need in retirement depends on the type of lifestyle you’re striving towards and when you plan to retire.

Research from the PLSA, in partnership with Loughborough University, suggests that retired couples living a moderate lifestyle outside of London, on average, spent approximately £34,000 in 2022 (excludes housing expenses). They suggest this amount should be enough for what we referred to as a ‘secure’ lifestyle earlier on.

As well as this funding your everyday spends, PLSA have calculated that this should also cover some extras, like a two-week holiday in the UK or Europe, once a year. It also covers spending £100 once a month on eating out.

The same research also suggests that a couple living an essential lifestyle would need £19,900, while a comfortable lifestyle for two would require around £54,500. As you can see, the amounts required can vary depending on your retirement goals. It’s also worth noting that the research charts how retirement costs have increased, so these figures may have increased by the time you reach retirement.

Note: If these amounts don’t seem like a lot for two, keep in mind that you’re likely to pay less tax and spend less on major housing costs like mortgages, but more on smaller costs, like heating bills and insurance.

Growing your money with compound interest

Let’s briefly talk about compound interest. Understanding the concept of compound interest is key if you want to steadily build a retirement fund over time.

Essentially, it’s “interest on interest” — interest gets paid into an account or fund when you save money, then once that interest is paid so that your savings grow, the next round of interest will be calculated based on this new total. Essentially, you are earning interest on the interest itself.

Compound interest plays a key role in growing your retirement pot, as the longer you keep building your fund, the more it will benefit from this effect. Pensions and long term savings accounts are designed to take advantage of long periods of saving where the money you put in earns compound interest over many years.

What are my options for saving for retirement?

There are a number of different ways to save and invest for later life, so let’s take a look at each of your options.

Pensions

There are a number of different types of pension that you might wish to pay into.

The State Pension

The State Pension is the pension that you’ll likely receive from the Government once you’ve reached the national retirement age. This is currently 66 for both men and women, though it will rise from 2026 onwards — use this tool from the UK Government to see what it will be based on your date of birth.

Wondering where the funding comes from for this pension? Well, you’ve been paying into it via your National Insurance Contributions. For most people, it acts as a baseline for any retirement income and is supplemented by other pensions or income.

To get the full standard state pension, it normally takes 30 qualifying years of National Insurance Contributions (if you started paying in before April 2016). For those who began afterwards, it’s typically 35 full years.

Defined contribution vs defined benefit pensions

Before we dive into the other types of pension, it’s worth taking a look at the difference between two categories that the different types of pension can fall into: defined contribution or defined benefit pensions.

A defined contribution pension’s worth, on retirement, is based on how much you have paid into the fund (and any additions that go along with that) and how well the fund’s investments have performed over the years. These days, they are the most common type of pension, and it’s becoming rarer to find a defined benefit pension.

A defined benefit pension, often called a final salary pension, is a type of workplace pension that pays you an income that’s based on your salary and how many years you have worked for your employer. It’s not dependent on how much you’ve put in. They are now rare, but are sometimes offered by large firms or public sector organisations.

Due to the way the pension industry has moved, the likelihood is that you’ll only ever have to deal with a defined contribution pension. However, it is worth knowing about defined benefit pensions just in case the need arises.

Workplace pensions

If you’re employed, you’re likely to come across a workplace pension. This is the scheme arranged by an employer through auto enrolment rules. Your contributions are taken directly from your salary each month and paid into your pension. In most cases, your employer will also add money to your pension, and you will also benefit from contributions from the Government through tax relief.

These schemes are often one of the most efficient ways to save as, provided you meet the requirements, your employer will contribute a minimum of 3% when you pay in 5% of your salary. It’s essentially a free top up to your retirement fund every month.

Personal pensions

A personal pension is a pension scheme that you set up and manage yourself, without employer involvement. Typically, you will open one of these pensions via a provider, who will collect your payments and invest them on your behalf.

You might choose to open a personal pension for a few reasons. For example, if you’re self-employed or you want a fund that’s outside of a workplace pension. Even if you’ve already got a workplace pension, you may wish to set up a separate personal one alongside it, as you’re allowed to have multiple pension funds.

You can still benefit from Government tax relief with a personal pension (depending on your tax rate). Your provider will usually claim this on your behalf.

Self-invested personal pension (SIPP)

A self-invested personal pension is a type of personal pension that gives you total control over what type of investments you want to make with your fund. You can do this yourself or pay a financial adviser to do it for you.

Generally speaking, the range of investment options in a SIPP is much wider than a provider-driven personal pension, and you can make changes as often as you like. It does usually require a much higher level of involvement, however.

Savings accounts

Now, let’s dive into the world of savings accounts for retirement. The main benefit for keeping some of your retirement fund in a savings account is that they are a much more stable and secure place for it than investments. And, you will still see your money grow thanks to interest being paid.

There are a range of savings accounts to choose from on the market, so it’s worth thinking about which ones are suited to your needs both now and further down the line. We won’t cover every type of account, but here are some you might consider.

Easy access savings accounts	Earn interest but still have the option to withdraw your funds instantly. Save at your own pace, but can access your money in a pinch. Interest rates are generally on the lower side when compared to other accounts. Looking for an easy access account? Check out our Instant Saver, which is available through our app and can be opened without a deposit (read our product summary).
Notice savings accounts	Allows withdrawals when you provide a minimum amount of notice. If you wanted to withdraw, you’d need to plan it sufficiently early in advance. You’ll often be rewarded with a competitive interest rate in return for your patience.
Regular savings accounts	You make minimum regular payments each month to get a competitive interest rate. If you don’t make the minimum payment, you’ll likely be penalised. Interest is typically paid on an annual basis. Can have limits on how many withdrawals you can make and some have upper limits on deposit size.
Fixed rate savings accounts	You deposit a lump sum of money and lock it away for a certain term to get a competitive interest rate. Over the term, you’ll receive a set interest rate, and you won’t be able to withdraw money until the account matures. You usually can’t access your money during the term of the account, unless you have extenuating circumstances. Looking for a fixed rate savings account? Our Fixed Savers are available in a range of terms, from six months to three years. Open one from the comfort of our simple and easy-to-use app.
Cash ISAs and Stocks and Shares ISAs	ISAs are accounts that allow you to save without paying tax on interest, income or gains earned. A Cash ISA allows you to save money and earn interest, just like regular savings. A Stocks and Shares ISA allows you to invest in stocks and shares and hold them in the ISA. Every tax year you can save up to a certain limit in one account or split the allowance across multiple accounts.
Lifetime ISAs	Lifetime ISAs are designed to buy your first home or save for retirement. You can hold cash or stocks and shares in them, or a combination of both. The government adds a 25% bonus to your savings, up to a maximum of £1,000 per year. You can put in up to £4,000 per year, until you’re 50 (your first payment must be before you’re 40). Counts towards your annual ISA limit.

Investing

Investing is another route many people take towards building a healthy retirement fund. At its most basic, investing involves backing something with your own money in a hope that it grows in value. There is a huge range of investments you can make, from stocks and shares and commodities to property and cryptocurrencies.

Before you consider investing, keep in mind that growth is not guaranteed, and that you could potentially lose your money. It’s a riskier prospect than paying into a savings account, and one you shouldn’t take lightly. We recommend that you always think through any decisions or seek advice from a financial professional beforehand.

There are some other factors you might consider:

• Your age: If you’re nearing retirement, investing the wealth you’ve built on riskier investments may not be right for you. On the other hand, if you’re young and just starting out, you might feel you have more to gain and less to lose.
• Your financial situation: If your current financial situation simply does not give you the room to take risks, then perhaps you need to reconsider.
• Your appetite for risk: If you’re simply not comfortable in putting your money at risk, then those riskier types of investment might not be for you.

Tips for saving for retirement

Start saving as early as possible

Starting to save for retirement as early as possible is an age-old piece of wisdom. If you’re just beginning your career, it may seem silly to be saving for the end of it when you need money right now. But it’s hard to ignore the benefits of compound interest. The sooner you start to save, the sooner you’ll start earning interest on your interest!

Even if you can’t put away a lot of money at the minute, don’t be put off from starting with small contributions. It all adds up and it helps you get in the habit of saving for those golden years. Plus, you can always step things up when your income grows. You will be in a much better position to achieve your retirement goals later on.

Thankfully, the UK Government has made life easier if you’re employed by introducing auto-enrolment. This means your employer will automatically pay some of your salary into a pension, unless you opt out. It means you don’t need to think twice about paying in, and your employer will top up your payment by at least 3%. This bonus is another reason to start early and keep at it — it’s basically extra retirement money for you.

Not sure where to start with basic savings? You’ll find a lot of great advice in our guide to how to start saving.

Keep track of your progress

While there will certainly be times you can take a hands-off approach, it’s important to check in with your retirement fund every now and then to check everything is going as planned. Doing so will ensure that there’s no nasty surprises down the road.

This may be as simple as taking a look at your pension pot to see how it’s performing or checking that your savings are reaching their potential in your account. If you have a diverse retirement fund that has a lot of different assets, you may wish to consider meeting up with a finance professional to review your progress every so often.

The goal of keeping track of everything is to make sure that you’re on track to reach your retirement goals and will be able to access the quality of life you’re looking for. So, you can guess this is a pretty important bit of advice!

Gradually ‘level up’ for a brighter future

Starting your retirement savings journey early is great, but as you progress in life, there might be the opportunity to make bigger contributions as your income grows.

If you’re working, you’re probably setting aside a fixed amount for your pension each year. But if you find yourself in a position to be able to, why not up that contribution as your career blossoms? It’s a smart move that will help fast-track your path to a shiny retirement pot.

Here’s a top tip: whenever you get a salary increase at work, consider giving your pension contribution a boost too. This way, you won’t accidentally splurge the extra cash that could have supercharged your retirement savings.

Should you decide to increase the contributions to your pension or make a lump sum deposit, it’s worth being aware of the tax relief limits set by the Government. These limits allow you to pay in up to a certain figure tax free, but any contributions beyond the limit will not receive tax relief. They apply to most private pension schemes.

Should you be looking for ways to either increase your income or cut your spending, you’ll want to read our money saving tips guide, which is full of useful hacks.

Talk to a professional

It’s never a bad time to speak to a financial professional about your retirement plans. Whether you think your savings could be doing more, you’re not happy with your investment portfolio or you’re considering a big decision with your pension, it’s always a good idea to get expert advice. They’re the best equipped people to give you advice on how to move forward in your circumstances, so don’t be afraid to ask for help.

Your retirement is important, and we hope this guide gives you a grounding in how best to build that pot up.

Obviously, it’s a very complex subject and impossible to cover every angle in detail in one guide, but you can be sure that you’re now in a great place to start.

Be sure to check out our savings hub and the Atom blog for more great content.