Are you saving enough for a comfortable retirement?

A recent report published by Pensions UK revealed that three quarters of UK workers are not on course to save enough for a 'moderate' lifestyle when they retire. The report says a moderate lifestyle will cost £32,700 for one person and £45,400 for two - but estimated just 23% of the working population were on course to reach such a level. Here, we consider how individuals can ensure they save enough for a comfortable retirement.

Your retirement lifestyle

According to the report, a basic retirement lifestyle costs around £13,900 annually for a one-person household and £22,500 for two people. A moderate lifestyle costs £32,700 for one person and £45,400 for two, while a comfortable lifestyle costs £45,400 and £62,700 respectively.

Pensions UK stated that the figures reflect increased everyday costs across such spending categories as food, household bills and transport. It expects 82% of the population to reach the minimum standard of living in retirement.

'Not enough'

Zoe Alexander, Executive Director of Policy and Advocacy at Pensions UK, said: 'Today's saving levels will not be enough for the retirement they expect. It is expected that around 82% of people reaching a minimum standard of living, but far fewer will go beyond that.

'That is out of step with what people expect for their future. Without action, too many risk facing a cliff-edge drop in income when they stop work. The government is right to be considering whether minimum contributions need to rise through the work of the Pensions Commission.'

Tax aspects of pension savings

There are two broad types of pension schemes from which an individual may eventually be in receipt of a pension:

• Workplace pension schemes
• Personal Pension schemes.

A Workplace pension scheme may either be a defined benefit scheme or a money purchase scheme.

A defined benefit scheme pays a retirement income based on final salary and years of service, while a money purchase scheme instead reflects the amount invested and the underlying investment fund performance.

An individual is entitled to make contributions and receive tax relief on the higher of £3,600 or 100% of earnings in any given tax year. However, tax relief will be restricted for contributions in excess of the annual allowance.

A money purchase scheme allows the member to obtain tax relief on contributions into the scheme and tax-free growth of the fund. If an employer contributes to the scheme on behalf of an employee, there is generally no tax charge on the member and the employer will obtain a deduction from their taxable profits.

Under the current pensions regime, there are no limits on either the maximum amount which can be invested in a pension scheme or on the total value within pension funds. However, there are controls which limit the tax reliefs available. Firstly, there are limits on the amount of tax relief available to the member in making the contributions to or accruing the benefits in their pension schemes. Secondly, there are tax free limits in accessing those benefits.