Working out how much you’ll need to live on in retirement can be a real challenge, especially as living expenses are increasing so much at the moment.

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. Meanwhile, if you own a home, you may have reduced or wiped out your mortgage by retirement age but then again, your energy and other utility bills, which have soared in recent months, will rise if you’re at home more often.

Yet 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 comfortable standard of living when you stop working, and why it’s important to consider how your outgoings may change in the future.

How much do you need for a comfortable retirement?

According to the latest research from consumer association Which? if you want to retire comfortably, you’ll need an income of about £26,000 a year after tax if you’re in a couple, or £19,000 if you’re single. Which? arrived at these numbers based on interviews with around 7,000 retirees about how they spend their money in retirement.

Rebecca O’Connor, head of pensions and savings from Interactive Investor, says that with a full State Pension of £9,627 a year each as a couple, you would each need to produce additional pension income from your savings of about £4,000 a year to achieve enough income for a ‘comfortable’ retirement, for example. However, this assumes both partners contribute equally, and your income is unlikely to be split 50/50.

She said: “You don’t pay tax on any income below the personal allowance, so tax doesn’t eat into State and private pension income at this level much. A couple would only be paying about £400 in tax between them a year.”

According to the Legal & General retirement calculator, a £150,000 pension pot at age 66 could produce an income of £4,000 a year using drawdown, assuming you take 3.5% from your pension each year after withdrawing the maximum of £37,500 tax-free cash.

This also assumes underlying investment growth of 3%, inflation running at 2% and charges at 0.4%, which are, of course, all variable and inflation is currently much higher than this at 10.1% in the 12 months to July, more than five times the government’s 2% target. However, based on these assumptions, by age 99, you’d have £27,000 left in your pension, so the hope is you wouldn’t run out of money and be left to rely on the State Pension. If investment growth and economic conditions are more favourable, your income could be considerably higher, but if we enter a prolonged recession, then you could end up with much less.

According to Which?, the annual income you need in retirement rises to £41,000 a year if you’re a couple wanting a ‘luxury’ retirement, or £31,000 a year for someone who’s on their own. Or, to fund a basic or essential retirement, a couple would need a post-tax income of £18,000 a year, falling to £13,000 a year for a single person.

However, bear in mind that the Which? figures are based on interviews with current retirees, and given inflation is currently running high, and bills are rising, you are likely to need more over coming years. 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 individual circumstances and requirements.

The general definitions of a ‘comfortable’ retirement income, compared to an ‘essential’ and ‘luxury’ income could help you define your needs:

  • Essential – provides you with enough to cover all your essential living costs such as food, housing, transport, bills, insurance, clothing and toiletries
  • Comfortable – includes enough to cover all the elements of the essential category as well as short-haul holidays, leisure activities, alcohol, tobacco and charitable giving
  • Luxury – covers both essential and comfortable spending, as well as long-haul holidays, gym or health club memberships, expensive meals out and a new car every five years.

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.

O’Connor said: “While estimates suggest that someone on an average salary paying the auto-enrolment minimum of 8% throughout their working life who will also receive the State Pension should just about be on track for a retirement somewhere between ‘essential’ and comfortable, it might still be a struggle to manage any unexpected high bills, such as property maintenance.”

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. Regardless of the type of pension you have, you should get an annual statement from your pension provider showing you how much your pension is currently worth and how much you can expect it to pay out at retirement.

How to calculate your retirement income

Most of us will have multiple pension pots, and to work out an estimated total value at retirement, you may want to use a pension calculator.

You can use the Rest Less Pension Calculator to see a forecast of the pension income you’re likely to get when you retire, based on the current value of your retirement savings. This can include your State Pension entitlement if you want it to, and you can also see the impact of taking 25% of your pension as tax-free cash. You can amend your retirement age and the level of income you want as well, to see how these affect the length of time your pension will last. 

Of course, these largely relate to private pensions, but it’s also important to understand how much State Pension you are likely to receive too, as this may form the foundation of retirement income

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 £179.60 a week (or just £9,339.20 a year) in the 2021/22 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.

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 has been temporarily scrapped for a year from April 2022 due to a surge in wages, which would have meant pensioners would have received a whopping 8% hike, but the Treasury has promised to reinstate it from April 2023. Read more about this in our guide What is the pension triple lock?

The Consumer Prices Index measure of inflation reached 3.1% in the 12 months to September 2021, so as this figure is higher than 2.5%, this is the amount the State Pension increased by in April 2022.

Despite this increase, inflation has continued to rise, reaching a 40-year high of 9.4% in June. So, for many the 3.1% uplift is unlikely to ease the pressure of living costs that are rising at a rate that is considerably higher than the pension increase.

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.

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:

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.

You can find a local financial advisor on VouchedFor or Unbiased, or 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 financial advice and are looking for somewhere to start, Rest Less Pensions are offering a free Pension Health Check with one of their experts. They can offer you information and guidance on the call and at the end will discuss whether you would benefit from paying for professional financial advice. Capital at risk.

Do you feel that you have enough saved for your retirement, or are you looking at building a pension pot for the first time? We’d be interested in hearing from you. You can join the money conversation on the Rest Less community or leave a comment below.

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