Working out how much you’ll need to live on in retirement can be a real challenge, especially as living expenses are so high at the moment.
For example, you might have plans to travel more frequently, or pursue particular hobbies, as you’ll have more free time once you’re no longer working, but now may be wondering whether you need to put these on hold for a while to get through these difficult times.
While everyone’s personal situation is different, and soaring inflation is a real concern, a ‘comfortable’ retirement is likely to be on most people’s wishlist. Here, we look at how much you might need to achieve a good standard of living when you stop working, and why it’s important to consider how your outgoings may change in the future.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
How much do you need for a comfortable retirement?
According to the Pensions and Lifetime Savings Association’s latest Retirement Living Standards research, to have a ‘moderate’ living standard in retirement, you’ll need an income of about £43,100 before tax if you’re a couple, or £31,300 if you’re single.
Assuming that you have a full State Pension of £10,600.20 a year each as a couple, you would each need to produce additional pension income from your savings of about £10,950 a year to achieve enough income for a ‘comfortable’ retirement, for example. After the full State Pension rises to £11,502.40 a year in April, this figure changes to £10,050.
However, this assumes both partners contribute equally, and your income is unlikely to be split 50/50.
The annual income you need in retirement rises to £59,000 a year if you’re a couple wanting a ‘comfortable’ retirement, or £43,100 a year for someone who’s on their own. Or, to fund a basic or essential retirement, a couple would need a before tax income of £22,400 a year, falling to £14,400 a year for a single person.
Bear in mind that everyone’s circumstances are different, so you may well need more or less to fund the type of lifestyle you want in retirement. As a general rule of thumb, experts suggest you need around two-thirds of your final salary at retirement after tax to maintain your current lifestyle, but this will very much depend on your personal requirements.
The general definitions of a ‘comfortable’ living standard, compared to a ‘moderate’ and ‘minimum’ living standard could help you define your needs:
- Minimum – Provides you with enough to cover all your essential living costs, with a little left over for fun
- Moderate – Enough to cover all your needs, but provides you with more financial security and flexibility
- Comfortable – Covers your essential outgoings, but gives you more financial freedom and luxuries, such as more to spend on holidays, clothes and home improvements.
Remember that with defined contribution pensions, the amount you end up with at retirement depends on how much you (and your employer if it’s a company scheme) have paid in, how the investments your pension savings have gone into have performed, and how much you’ve paid in charges. You can learn more about how defined contribution pensions work in our guide What is a defined contribution pension? and about where your pension is invested in our article Where is my pension invested?
The amount of income you’ll receive also depends on whether you draw money out from your pension while leaving your savings invested, or whether you use your pension to buy an annuity, or income for life.
What if I have a defined benefit pension?
If you have a defined benefit pension, often known as a final salary pension, then you’ll receive a guaranteed income when you retire. This is usually based on a proportion of your final year’s pay, multiplied by the number of years you’ve belonged to the scheme.
You’ll normally have been given a booklet when you first joined the scheme giving you details of how much you’re likely to get when you retire. If you’ve lost track of this, ask your pension administrator how your plan works and how much you’re likely to receive, so that you can work out if this is enough for you to retire on. Learn more about defined benefit pensions in our guide What is a defined benefit pension?
How much is my pension worth?
The value of your pension is likely to fluctuate over time, but you can find out how much your pension is worth from your most recent pension statements. Find out more in our article Your annual pension statement explained.
Your pension statement will give you an estimate of how much your pension could be worth at retirement based on a number of assumptions, and also how much income your pension could provide.
These figures assume that you’ll continue to pay into your pension until you reach retirement age, and are based on a particular rate of investment growth. However, it’s important to remember that no one can predict with certainty exactly how your investments will perform, so these figures shouldn’t be taken as the actual amount you will receive at retirement.
How much State Pension will I get?
The more you get from the State Pension, the less you’ll need to save into private pensions to achieve the level of income you want in retirement. Bear in mind though that, as previously mentioned, the maximum State Pension for those who reached or will reach retirement age on or after 6 April 2016 is £203.85 a week (£10,600 a year) in the 2023/24 tax year, so if you’re aiming for a comfortable or luxury income, you’ll need to save significant sums into your workplace or personal pension to supplement it.
If you retired before 6 April 2016, the most you can get from the basic State Pension in the 2023/24 tax year is £156.20 (£8,122 a year).
Each tax year, the new State Pension increases by the highest of the growth in wages, September’s inflation figure as measured by the Consumer Prices Index (CPI), or 2.5%. This is known as the ‘triple lock guarantee’. The triple lock was temporarily scrapped for a year from April 2022 due to a surge in wages, but the Treasury reinstated it from April 2023 when the State Pension rose by 10.1% (in line with September’s inflation figure). Read more about this in our guide What is the pension triple lock?
Not everyone is eligible for the full amount of State Pension, and the amount you are entitled to will obviously have an impact on how much more (or less) you might need to save into your private pension. Your State Pension entitlement is determined by the number of ‘qualifying years’ you have of paying the appropriate amount of National Insurance Tax. Working out what level of State Pension you are eligible for can be confusing, but you can find out more in our articles How the State Pension works and State Second Pension and SERPS explained.
Myron Jobson, senior personal finance analyst at interactive investor, said: “Thankfully, the basic income needs at retirement will mostly be meet for savers eligible for the new full State Pension, which increased to £10,600 in the 2023/24 tax year – but that’s only for people who have retired since 2016 and have managed to rack up 35 years of national insurance contributions.
“For the many who will receive a lower State Pension, making up the difference could be a tough ask amid the biggest fall in living standards in generations.”
Could retirement cost less than you think?
There are plenty of online pension calculators that can help you determine how much income you may receive from your current pension savings. However, if your estimated income is less than you had hoped, or your pension has fallen in value, you may still be able to afford retirement. There are several reasons why retirement might cost you less than you think:
- Your spending could change, and your outgoings could reduce, particularly if you have managed to wipe out some debts such as loans and stop using credit cards, or travel costs reduce.
- You can access 25% of your pension as tax-free cash from age 55 (rising to 57 from April 2028) which may be used to wipe out any existing liabilities such as your remaining mortgage to retire debt-free. However, make sure you weigh up all the pros and cons of doing this carefully first. Read our article Should I take a tax-free lump sum from my pension? to find out more.
- You will most likely pay less income tax in retirement. You won’t be paying National Insurance and your tax bills can be carefully managed by using your tax allowances (such as your personal allowance and tax-free pension cash) to reduce your liabilities. Seek professional advice from an accountant on the best ways to do this.
- You may be able to rely on different sources of income in retirement – rather than solely your salary. This might include, for example, the State Pension, ISAs, and other company and private pensions.
- You have more choice than ever when it comes to how you can use your pension to generate a retirement income since the introduction of pension freedoms in April 2015. Find out more in our article Your pension options at retirement.
How can you afford the retirement you want?
You may feel you cannot afford the retirement you want, but with some careful budgeting alongside the right financial advice (see below) you may be able to boost the amount of income you receive when you stop work. Also, of course, everyone’s situation is different and what you might be looking for in retirement is unlikely to be the same as everyone else.
However, if you’re thinking about how you are going to afford the retirement you would like, we’ve produced several retirement guides to help you find ways to boost your pot:
- If you have no retirement savings, our article Saving into a pension for the first time can provide you with some information on how to start building your pension pot.
- If you are self-employed, your pension options can be confusing. Our article Self-employed pension options explained provides guidance on how you can save for the retirement you want if you work for yourself.
- If you are in a relationship and you are not working or are taking a career break, your partner may be able to contribute to your private pension pot on your behalf. Our article, Can my husband or wife pay into my pension – or can I pay into theirs? explains how to do this.
- It’s also worth looking at our article How much should I save for retirement? to find out more about how much you should try to put away each month.
- Remember that pensions aren’t the only way to save for retirement. You might also want to consider paying into an ISA if you want more flexibility over when you can access your savings. Learn more in our guide Is it better to save into an ISA or a pension?
- If you’re worried about how long your retirement savings might last, our guide How long will my pension last? explores some of the factors which could affect when your pension runs out.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “With the cost-of-living crisis continuing to squeeze our budgets, now may simply not be the time to shovel more money into a pension, but regular prompts to assess your pension contributions could prove hugely useful in terms of getting people back on track when times get better.
“Boosting contributions when you get a salary increase or change jobs can really work as you don’t miss the extra money and it’s something that could help everyone – not just higher earners – boost their pensions for the future.”
Where to go for more help
Planning for retirement isn’t always straightforward, so if you’re not sure whether you’re saving enough, or you’re not sure which pension to choose, you might want to speak to an independent financial adviser who can recommend the best course of action based on your individual circumstances.
For more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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