Why sticking to this popular pension saving strategy will leave you short in retirement

Knowing how much you should be saving towards your pension can be baffling – especially if retirement is on the horizon. You may have heard of the old adage of halving your age when you start paying into a pension, and using that figure as your contribution.

This would see a 24-year-old paying in 12pc of their monthly salary. Someone who started saving later in life, at age 40, would contribute 20pc of their salary.

The idea is the older you begin your pension saving journey, the more you pay in, and therefore you should still build up a decent nest egg by the time you retire.

While this idea will certainly help generate a bigger nest egg than sticking to the minimum 8pc auto-enrolment contribution, analysis by the wealth manager RBC Brewin Dolphin shows that it could leave savers short when they come to retire.

Here, Telegraph Money explains how much you’d save using the “half your age” rule, and what figure you need to aim for instead.

How much can you save by aiming for half your age?

Take a 22-year-old earning the median full-time salary and contributing 11pc to their pension. By age 67, they would accrue a pension pot of £450,000, assuming a 4pc annual return net of charges.

In contrast, a late starter who began saving into a pension at age 50 would pay in 25pc of their earnings. Based on the median salary for this age group, they would only build up a pot worth £211,000. 

According to RBC Brewin Dolphin, to reach the same £450,000 pot as the 22-year-old, they would need to contribute a staggering 45pc of their salary.

The premise of halving your age to find the optimum pension contribution level is therefore better suited for younger ages.

For example, a 30-year-old who started saving for retirement would pay in 15pc of their income, and by age 67 would have a pot of £448,000 – not dissimilar to the nest egg accrued by the 22-year-old.

Is £450,000 enough for a comfortable retirement?

While £450,000 may seem like an enormous sum, rising costs mean you’ll need to save increasing amounts of money in order to have a comfortable retirement.

According to the Pensions and Lifetime Savings Association, a trade body, a single person needs an annual income of £37,300 to enjoy a “comfortable retirement”. 

This includes some luxuries, such as two holidays abroad each year, beauty treatments and theatre trips.

In order to produce this level of income, a 67-year-old with a full new state pension would need pension savings worth £630,000, according to RBC Brewin Dolphin. This is an increase of £90,000 compared to 12 months ago. 

None of the pension pots built up by contributing half your age reached that figure. 

An 18-year-old would need to pay 11.5pc of their salary every year to hit that target by their 67th birthday, while a 22-year-old would have to contribute 13pc.

A person who had delayed saving for retirement until the tail-end of their career, only beginning at age 50, would need to contribute an incredible 62.5pc of their salary – assuming this doesn’t exceed the annual pension allowance of £60,000.

Those that don’t have a full state pension would need to amass an even bigger pot.

Indeed, it seems very few people are saving enough to enjoy this sort of comfortable lifestyle: only 12pc of working people are on track to achieve an annual retirement income of £37,300, according to government figures.

Daniel Hough, financial planner at RBC Brewin Dolphin, said: “An annual income of £37,300 would require substantially more than any of the pots built up through the half your age rule. 

“Adages and sayings may provide a helpful steer, but there is no ‘one size fits all’ approach to retirement – everyone’s circumstances and financial objectives are different.”

He added: “However, what our figures show is the power of compound interest over time – the longer you can leave a pot of money to grow, the better. 

“So, for younger savers who don’t necessarily have the responsibilities that often come later in life – such as mortgages and kids – putting away as much as is feasible will pay off in the long run.”

How much should you save for retirement? 

It’s hard to come up with a new catchy saying about how much to save for retirement, as it depends on how much spare cash (and debts) people have, how much state pension they are expecting, and what sort of lifestyle they want when they finish work. 

However, Mr Hough stresses that one thing is clear: sticking with the minimum auto-enrolment amount (5pc of an individual’s qualifying earnings plus 3pc from employers) will not produce a comfortable retirement lifestyle.

To try and boost your savings effortlessly, increase your pension contributions whenever you get a pay rise. 

That might mean a 1pc increase every year or two, which will gradually make a big difference over time.

According to Jamie Clark, retirement specialist at the wealth manager Quilter, you may be able to set up automatic increases to your pension – this, he said, is “one less thing to remember and is a great way to help you reach your goals hassle-free”.

He added: “Alongside your monthly pension contribution, if you receive a bonus or inheritance, consider earmarking 10pc of it to your pension pot, as it could give a big boost to your overall savings, and therefore your quality of life in retirement.”