Worried about your pension? Try our handy new pension hack that reveals if YOU have saved enough for a comfortable retirement

Retirement planning can feel like a shot in the dark. We throw away what we can during our working years, hoping that it will lead to a comfortable lifestyle in later years. But it’s hard to know how far our savings will really go.

A useful new retirement planning rule could help overcome this problem. This is a simple way to understand exactly how much you need to save in your retirement pot to afford your dream retirement lifestyle. All you need is a pen and paper.

Plan a retirement lifestyle

The ‘£300 Rule’ is a nifty tool for figuring out how much money you need to save for later in life’s essentials, and even how much money you need to save. inflation.

Here’s how it works. According to Standard Life’s calculations, for every £1 of guaranteed monthly income you want in retirement, you’ll need to save £300 in your retirement pot.

Let’s take a very simple example: someone who wants to spend £1 a month on scratch cards for the rest of their retirement. Under the rule, to do this they will need to have saved £300 in their pension when they retire at 65.

Pete Cowell, head of annuities at Standard Life, says: ‘Pensions often feel abstract. The £300 Rule links retirement income to familiar bills and subscriptions, helping people imagine what their pension should provide and plan with greater confidence.

‘This shows how, in pounds and pence, daily monthly costs translate into the retirement savings needed to cover them over a lifetime.’

Using this rule can help you decide which spending habits are non-negotiable and which you can live without.

Get a streaming subscription. An average monthly subscription like Netflix costs £12.99; This means you’ll need to save £3,897 in your pension to be able to afford this in retirement. If this is a non-negotiable expense for your household, you can now allocate £3,897 of your pension pot to it.

Now let’s look at a car that may seem like a necessity when planning for retirement. But given ballooning insurance, tax and petrol prices, these cost an average of £3,500 a year, or almost £292 a month, according to Standard Life. Under the £300 Rule, it will consume £87,500 of your pot.

After seeing this, you may decide to switch to public transportation. You can then direct the money towards a golf club membership, for example; this costs on average £75 a month (about £22,500 of your pension).

According to calculations by the standard life show, you’ll need to save £15,000 for a £50-a-month gym membership, £9,000 for a £30-a-month broadband contract and £7,500 for a £25-a-month mobile phone package.

How do the numbers stack up?

This financial planning trick is based on how much it would cost to use your retirement money to purchase an annuity; This allows you to transfer all or part of your pot to a provider in exchange for a guaranteed monthly income for life.

The alternative is usually withdrawal, where you deposit your retirement savings and deposit it when you need it.

Standard Life assumes an annuity rate (the total amount of pot you’ll receive in a year) in this rule of thumb is 5 percent. This means you’ll need to pay £300 upfront to earn £15 per year of income through an annuity (equivalent to £1 per month after tax). Hence the £300 Rule.

Additionally, these calculations are based on inflation-related annual income, so payments will increase each year based on the retail price index (RPI).

So, if you want to find out the maximum monthly income you can receive, divide your total retirement amount by 300.

For example, if you have £500,000 in your pot, you can expect regular income of £1,667 per month.

The actual amount you need may vary in real life depending on your circumstances. For example, the £300 Rule assumes you are a basic taxpayer. This means you need to earn £15 a year to have £12 left over after tax. So for this to work your annual income in retirement needs to be £52,270 or less. If you’re a higher or additional rate taxpayer, you’ll need to save more than £300 to secure that £1 ongoing monthly income, as a greater proportion of your money will go to tax.

The rule also assumes an annual income rate of 5 per cent, which is currently available to a healthy 65-year-old with a pot of £100,000. In reality, this may be higher or lower depending on the age at which you receive the annuity, your health and circumstances. interest rates. You’ll also have a personal allowance of £12,570 per year which you can earn for free. income tax.

However, our calculations assume that this allowance is used before you receive income from your annuity. Your state pension payments alone will likely eat up most of the tax-free allowance (£12,548 for the full new amount).

Tips to get there

While the rule can transform your planning, the thought of needing £300 for every £1 of monthly income can be daunting.

However, to reach this amount in retirement you only need to put part of each £300 into your pension. This is because you get tax relief on pension contributions at your marginal tax rate.

Additionally, if you’re saving through a workplace scheme, your payments will also benefit from employer contributions. The minimum amount they must contribute is 5 percent versus 3 percent of your salary. But some generous plans match your payments.

The payments you make will increase each year as you invest. And as your money grows, so do the returns, which will take a lot of the work out of it.