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How Much Will You Need to Retire?

Many people overestimate how much they’ll need to live on in retirement, thinking that they’ll spend the equivalent of their wages.

The common perception is that you’ll need between half and two-thirds of the final salary you had when you were working, after tax, to maintain your lifestyle once you retire. 

But is that really the case? Which? has surveyed more than 6,000 real retirees to find out their spending habits, to help you answer two key questions when it comes to planning your retirement:

  • How much income money will I need in retirement?
  • How much money will I need to save in advance to deliver that income?

How much do people spend in retirement?

Households spend just under £2,200 a month, or around £26,000 a year, on average when research was carried out in 2018.

This covers all the basic areas of expenditure (which had a combined cost of £17,000 per year on average) and some luxuries, such as European holidays, hobbies and eating out. Aiming for this level of income will provide a good platform for your retirement. 

You’d need £39,000 a year if you include luxuries such as long-haul trips and a new car every five years.

Travelling and holidays are a very important part of retirement for members, with people spending nearly £4,500 a year on this part of their life.

Priorities change slightly as you move through your retirement years. Members tend to spend relatively less on food and drink, housing payments and recreation as they get older, but more on utility bills, and health and insurance premiums.

How much money will you need in your total pension pot?

It’s important to think about your pension income in building blocks – first with the state pension, then with your private or workplace pension savings, and then with any other additional income you might get, from investments or property. 

·         State Pension

Once you reach state retirement age, currently 65 for men and women, the government will provide a sizable chunk of your post-retirement money. 

The state pension is currently £258.40 per week for a couple (if you qualify for it before 6 April 2016). This is equivalent to £13,437 a year, bringing a couple half way towards the £26,000 annual income level (before tax). 

The full level of new state pension (for people qualifying for it on or after 6 April 2016) in 2019/20 is £168.60 per week, but not everyone gets that much.

In April 2018, the average for a man who qualified after April 2016 was £151.84 a week (£7,895 a year), while the average for a woman was £143.85 (£7,480) a year. Combined, that’s around £15,375 a year. 

·         Final Salary Pensions

How much extra income you need to generate from your private pension savings will depend on the type of private pension you have. 

Final salary pensions pay you a regular monthly income based on your earnings while you were working. 

If you have one or more of these, you should receive annual updates telling you how much you can expect to get.

Adding that to your state pension (which you can find out by getting a state pension forecast) will help you understand how much you’ve got to play with in retirement.

·         Money Purchase Pensions

A money purchase (or defined contribution) pension sees you invest your pension contributions into a big pot. When you come to retire, you can decide how to generate an income from it. 

Firstly, you can take your entire pension pot in one go, but this will mean it’s entirely down to you to make the money last and you’ll invariably pay a substantial amount of tax.

Alternatively, people with these pensions opt for income drawdown or an annuity when it comes to taking money out of their pension. 

If this is you, we’ve worked out how much you need in your pension pot to have enough to retire…

If you were looking to get a comfortable post-tax income of £26,000 a year and wanted to get a guaranteed income paid to you via a joint-life annuity, you’ll need a pot of £267,800, according to our calculations. 

To get the same amount from income drawdown, which sees you keeping your money invested in your pension and withdrawing a regular income, you’d need £206,500. This assumes your savings grow by 3% annually.

Producing post-tax annual income of £39,000, including the state pension, would mean an initial pot of around £615,500 to buy a joint-life annuity or £455,500 invested in income drawdown.

How much do I need to save into a pension at different ages?

If you wait until you are 40 to begin saving for the future, you’ll need to contribute £487 per month to achieve a comfortable retirement by the time you reach state pension age.

The figure rises to £1,075 per month if you are aiming for a luxurious lifestyle.

The projections contain some quite scary numbers, although saving a few hundred pounds per month from your mid-20s is obviously more palatable than having to find much more if you leave your retirement saving until later in life.

Your monthly income should rise as you move through the decades and if you are in a company pension scheme, your employer will be contributing some towards your target amount.

The reassuring thing is that although you probably won’t be saving at the above levels in your 20s or 30s, you’d have probably kicked off your retirement pot at least, and won’t have to start saving from scratch in your 40s and 50s.

Pension tax relief – Free government money

When you save into a pension during your working life, the government likes to give you a bonus as a way of rewarding you for saving for your future. This comes in the form of tax relief.

When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government.

Tax relief is paid on your pension contributions at the highest rate of income tax you pay. So:

  • Basic-rate taxpayers get 20% pension tax relief
  • Higher-rate taxpayers can claim 40% pension tax relief
  • Additional-rate taxpayers can claim 45% pension tax relief

Things work slightly differently in Scotland. For more details; give us a call today 01303 230453

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