10 min Read
05 Aug 2015

How much do I need to retire comfortably?

Reader question: How much do I need to retire?

I have been reading a lot about the new pension rules and being able to cash in my pension pot. However, I do not want to withdraw money from my pension in this way as I am worried that it will run out. Also, I don't know how much income I need when I retire.

What is the average pension income and how much pension do I need? I'm really confused, any help would be appreciated.

My response

There's been a lot of press coverage over the new pension rules, especially concerning people raiding their pension and spending all their money. But how can you expect people to make sensible decisions when most people don't know how much income they need to retire?

Interestingly a new piece of research by True Potential has found that people think they need £23,457 a year for a comfortable retirement income. However, the average UK pension pot could only support that income for 5 years. The reality is that the average pension pot could provide just over £6,000 a year, in today's money!

So that's a big problem. How do you work out how much income you need to retire and how big your pension pot needs to be to deliver it? Also, how much should you be putting into your pension?

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How much do you need to retire comfortably?

First of all you shouldn’t worry about what the average pension is or what the average income in retirement stands at. How much you need depends on your personal and financial circumstances.

Quickly work out what you will get when you retire

The fastest way to work out what you will get is by using our simple pension pot calculator. Pension pot calculators can be quickly used to work out what your pension pot is worth (if you have one already) and how much income you will get. I have used our pension pot calculator to find out how much my pension will be, and below I explain how to use it in the same way that I did.

Pension pot calculator

Our calculator can show you what age you can retire at; how much pension you need and how much extra you need to save to get the retirement income you desire.

View pension pot calculator

Step 1 – How much income do I need to retire?

First of all, write down all your monthly outgoings such as bills. Include only those things that will continue once you’ve retired. Will you still be paying a mortgage? Think about how you are planning to pay off your mortgage.

Then simply total all these figures up to get a monthly figure.

Step 2 – How much pension will I get?

Looking at your personal results from the pension pot calculator, you’ll see an estimation of the size of your pension pot when you retire, in today’s money. This figure assumes a 5% growth rate (which is the rate the industry regulator, the FCA, use as their mid range assumption) and inflation of 2.7%.

You will then see an estimated amount of tax-free cash (that you can set to a maximum of 25% of your pension pot) which you can have tax-free and an estimate of the gross income you can take from the rest of the pension. Obviously under the new pension rules that came into effect from April 2015 you can take as much of your pension as you want as a lump sum, but, remember only 25% will be tax-free with the remainder taxed as income.

You are then presented with a summary of how far ahead or behind the sort of income that you will likely need in retirement you are, given your current salary.

Step 3 – Work out your net retirement income

Don’t forget that income from pensions is taxable. So while the calculated figures are in today’s money (i.e. taking into inflation) they are gross of tax. You can find out what your net monthly pension will be by using a PAYE calculator.

PAYE calculator

This recommended calculator will tell you how much your net monthly pension income will be. You can use this tool to work out if your pension will be enough to meet your bills  and other outgoings.

View PAYE calculator

Was it not what you were hoping for?

The chances are that your pension pot is not worth as much as you’d hoped and your retirement income will be lower than you need. So now look at:

How much do you need to save into your pension?

One way to boost your retirement income is to pay more into your pension. To work out how much you would need to pay enter affordable amounts into the ‘personal contribution per month’ section of the pension pot calculator. It will automatically recalculate the amount of pension you might receive in retirement. By playing with this section of the tool you can see how much you need to pay into your pension versus what you can afford.

If you are employed, will your employer pay into your pension as well? Some employers will match the amount employees pay into their own pension. If your employer will match at least part of your contributions it will give your pension pot a massive boost.

Once you’ve tried the above tweaks you need to work out when you can afford to retire.

When can you afford to retire?

If your pension pot is still not big enough to fund the retirement income you want then you may need to consider delaying your retirement. This gives you more time to pay into your pension and hopefully more time for your pension pot to grow. Alter the retirement age in the pension pot calculator to find out when you can retire. How much you need to retire at age 65 is a lot less then how much you need to retire at age 60 or age 55. Also don’t just focus on your pension income…

Do you need your pension tax free cash to pay off your mortgage?

Don’t forget to allow for any withdrawal of tax free cash you plan to take. Alter the amount you plan to take to see the impact on your potential income. By not taking 25% of your pension funds as tax-free cash you will increase your retirement income by up to a third. Is there going to be enough in your pension pot to even pay off your mortgage if you still need to?

Get a low cost pension

The costs applied by your pension provider will reduce your pension pot by thousands of pounds over time, which in turn will reduce your retirement income. So the key is to use a low cost pension. By reducing the projected charges in the advanced settings of the pension pot calculator, you can see what the benefits of a low cost pension could be for you.

One of the most important things you can do is ensure you are using a low cost SIPP or pension to save for retirement. The cost of a pension is determined by the size of your pension fund.

The best & cheapest SIPPs - low cost DIY pensions

To help you choose the best pension product we’ve analysed the options available on the leading pension products.

View post

The next step if you’ve not already got a pension

Now that you have an understanding of what you might need in retirement it is important to take action and put your plan into practice. Remember, if you don’t plan for retirement it will never happen. No one is going to do it for you. You can start a pension online with the UK’s leading pension provider with a one-off payment of just £80 or with a regular contribution of £20 a month. Most people spend more than that on coffee each month.

You don’t even have to decide your investment choices to get up and running. Plus it only takes a few minutes to set up. It’s popularity stems from its cost effectiveness, excellent customer service and online functionality.

As I said,  if you don’t plan for retirement it will never happen.

Put your plan into action

The earlier you start contributing to a pension, no matter how small, the sooner you can retire

Secure your retirement

Article overview

Key points

  • Follow the below steps to work out how much income you will need after retirement.
    • Write down all of the outgoings that will continue once you’ve retired.
    • Use our pension pot calculator to work out how much income you will get from your pension.
    • Income from pensions is taxable (except the first 25% which is tax free). Use a PAYE calculator to work out your net monthly pension income.
  • If your income is not enough to cover the outgoings calculated in step 1 you have a few options.
    • You can boost your income by paying more into your pension. To work out how much you would need to pay, enter affordable amounts into the ‘personal contribution per month’ section of the pension pot calculator.
    • Alter the retirement age in the pension pot calculator to find out when you can retire.
    • Allow for any withdrawal of tax free cash you plan to take as you may wish to pay off your mortgage.
    • Ensure you are using a low cost SIPP or pension to save for retirement. I’ve analysed the charges on the leading pension products for you in my article The best & cheapest SIPPs – low cost DIY pensions.
    • Remember, if you don’t plan for retirement it will never happen. No one is going to do it for you. You can start a pension online with a one-off payment of just £80 or with a regular contribution of £20 a month. Most people spend more than that on coffee each month.

Written by Damien

Damien is one of the most widely quoted money and investment experts in the national press and has made numerous radio & TV appearances. He created MoneytotheMasses.com while working in the City when he became disillusioned with the way the public were left to fend for themselves because they could not afford financial advice.

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