Worried about your pension? Welcome to the Rule of £300: Try our helpful new pension hack that reveals if YOU have saved sufficient for a cushty retirement. All you want is a pen and paper!

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

A handy new pension planning rule of thumb can help tackle this issue. It’s a simple way of figuring out exactly how much you’ll need to have saved in your pension pot to afford your dream retirement lifestyle. All you need is a pen and paper.

Plan a retirement lifestyle

The ‘Rule of £300’ is a nifty tool that reveals how much money you’ll need to save for your later life essentials – and even accounts for inflation.

Here’s how it works. For every £1 of guaranteed monthly income you would like in retirement, you’ll need £300 saved in your pension pot, according to calculations from Standard Life.

Let’s take a very basic example: someone who wants to spend £1 a month on scratchcards for the remainder of their retirement. Under the rule, they will need to have £300 saved in their pension pot by the time they retire at 65 to be able to do that.

Pete Cowell, head of annuities at Standard Life, says: ‘Too often pensions feel abstract. By linking retirement income back to familiar bills and subscriptions, the Rule of £300 helps people picture what their pension needs to deliver, and plan with greater confidence.

‘It shows, in pounds and pence, how everyday monthly costs translate into the pension savings needed to cover them for life.’

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

Take a streaming subscription. An average monthly subscription such as Netflix costs £12.99, which means you will need £3,897 saved in your pension to afford it through retirement. If this is a non-negotiable spend for your household, you can now earmark £3,897 of your pension pot for it.

Now let’s look at a car – which may seem a necessity when you are planning retirement. But between ballooning insurance, tax and petrol prices, they cost an average £3,500 a year to run – or almost £292 a month, says Standard Life. Under the Rule of £300, it will eat up £87,500 of your pot.

After seeing this you may decide you could switch to public transport. You could then redirect the money to spending on a golf club membership, for example, which will cost £75 a month on average – some £22,500 of your pension.

You’ll need £15,000 saved for a £50 monthly gym membership, £9,000 for a £30 a month broadband contract and £7,500 for a £25 a month mobile phone package, calculations by Standard life show.

How the numbers stack up

This financial planning trick is based on how much it would cost to use your pension to buy an annuity, which allows you to hand over all or some of your pot to a provider in return for a guaranteed monthly income for life.

The alternative to this is typically drawdown, where you leave your retirement savings invested and dip in as and when you need it.

Standard Life assumes an annuity rate – the amount of your total pot you will receive a year – is 5 per cent in this rule of thumb. This means to secure an annual income of £15 via an annuity – equivalent to £1 a month after tax – you will need to pay £300 upfront. Hence, the Rule of £300.

Plus, these calculations are based on an inflation-linked annuity, so payments will rise by the retail price index (RPI) each year.

So if you want to know the maximum monthly income you can secure, divide the total amount you have in your pension by 300.

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

The actual amount you need may vary in real life depending on your circumstances. For example, the Rule of £300 assumes you’re a basic rate taxpayer. That means you’ll need to earn £15 a year to be left with £12 after tax. So for it to work, your annual income in retirement would need to be £52,270 or less. If you are a higher or additional rate taxpayer then you will need more than £300 saved to secure £1 of recurring monthly income, as more of your money will go towards tax.

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

But our calculations assume this allowance has been used up before you receive income from your annuity. It’s likely your state pension payments alone – £12,548 for the full, new amount – will use up most of the tax-free allowance.

Tricks to get there

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

But you only have to pay a portion of each £300 into your pension to achieve this sum at retirement. This is because you receive tax relief on pension contributions at your marginal rate of tax.

Plus, if you are saving into a workplace scheme, your payments will benefit from employer contributions. The minimum they must contribute is 3 per cent of your salary to your 5 per cent. But some generous schemes match your payments.

The payments you make will also grow every year as they are invested. And as your money grows, the returns are compounded, which will do a lot of the heavy lifting.