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How much pension income will you have when you retire?

8 minutes

Budgeting is important when you retire, especially if you decide to stop working. We’ll walk you through how to plan for a comfortable retirement.

A detailed plan can play a vital role in getting your budget retirement ready.

Retirement can be a golden period of your life, packed with holidays, new hobbies and time spent with family and friends. It’s certainly romanticised by us all, and it’s a goal many of us work tirelessly towards. However, to enjoy a comfortable retirement, you’ll need to consider how much income you need. At the moment, almost half of Brits don’t believe they’ll have met their retirement financial goals.

With the average life expectancy of men being 79.4 years and women being 83.1 years, it could mean your pension might need to last longer than you think.

To ensure you live comfortably, and have enough to get by, you’ll need to start budgeting and planning. Fortunately, there are several retirement products, such as private pensions and annuities, to boost mandatory workplace pensions and State Pension income. With the help of savings, smart investments and good preparation, you may have enough to fully enjoy your retirement.

How much do you need to retire?

It’s generally thought that a pension income worth more than 50% of your final wage before retirement will keep things ticking over nicely. But it’s not always the case, especially during a financial crisis. After housing costs and any tax deductions, pensioners had an average weekly income of £349 in the 2022 financial year.

Just the essentials?

A two-person household will need at least £19,000 a year in retirement income to cover the essentials, such as food, housing, clothing and more. Whereas a single-person household should aim for at least £12,000 to cover everything they need. Whilst these figures don’t seem like a lot, you may be claiming on personal finances and a pension until your 90s or 100s, so it’s worth looking into pension schemes earlier on in life.

Looking for something more comfortable?

If you want the flexibility to indulge a bit more, such as a holiday here and there, gifts for family or lifestyle choices, you’ll need at least £8,000 more each year to cover this on top of the essentials. For single-person households, £20,000 a year should cover the basics and more, with careful budgeting. However, for two-person households, you want almost £10,000 extra to cover everything plus gifts and treats. You’ll need to aim for around £28,000 a year.

Aiming for a more luxurious retirement?

You’ve worked hard, so why not splurge a little on yourself? You may be aiming to keep up with your health through gym and spa memberships as well as jet-setting throughout your retirement. It’s still okay to enjoy the finer things in life when you retire, you’ll just need to budget for it.

As a rule, single-person households should aim to bring in at least £31,000 every year. Whereas, two-person households might want to consider at least £43,000 coming in per year.

What sources of income can you have in retirement?

You’re not just stuck with one type of income when you retire; you can have multiple savings options on the go. You’ll just need to remember that whatever is classed as income though, could be taxed as such. If you’re ever unsure, it’s worth speaking to a financial adviser.

1. Private pension

A private pension can be purchased by you as a means to generate income when you retire. This isn’t always the same as a workplace pension or State Pension, but it does give you another pot to save into. You’ll pay in a set amount that is invested by your pension provider, you can choose level of investment risk that you feel comfortable with.

2. SIPP (self-invested personal pension)

SIPPs allow you to pay money into a pension pot for the purpose of saving for retirement. However, these pensions are designed to be invested, allowing you to potentially build up money on the stocks and shares it’s been invested in. You have the full freedom to invest in what you feel is right, controlling where your money goes.

3. State pension

The State Pension is a schemed offered by the government that can be claimed only if you have between 10 and 35 qualifying years on your National Insurance record. Qualifying years count as any working years where you paid National Insurance Contributions or received National Insurance credits. Anyone with 10-34 qualifying years (under new State Pension laws), receives part of the State Pension. However, anyone with over 35 years will receive the full State Pension.

4. Workplace pension

It is your employer’s responsibility to set up a workplace pension scheme and you’ll be automatically enrolled if you’re classed as a worker, aged between 22 and State Pension age and earn at least £10,000 a year. When you hit the retirement age, according to your pension provider, you can start withdrawing your pension.

5. Annuity

An annuity offers a guaranteed income for life when you retire, and is commonly purchased using pensions. Depending on your life expectancy or any medical conditions you have, you may qualify for an enhanced annuity that offers higher incomes for people at risk. What’s more, this type of investment poses less risk than investment-linked products.

6. Salary

That’s right, despite reaching pensionable age, you can continue to work. Unless there are medical grounds to do so, or you work in a certain industry, like the fire service, you can’t be forced to retire. If you want to keep working, you certainly can. In fact, around 16.2% continue working well into their 70s. Whilst you can continue to work, if you also decide to take from your pension, you may end up paying more in tax.

7. Savings

ISAs, premium bonds or other savings accounts are also a good idea, especially for a rainy-day fund. For example, you might want to gift your grandchildren some money, which you can do by saving into a children’s bond. You may just want to put something aside for your next holiday and set up a regular saver.

8. Investments

Although they offer a lot of risk, investments can be a long-term solution for some. Where investments are concerned, you’ll purchase a stock at a set price, which can then either increase or decrease in value over time. Investing for the first time can be daunting, complex and filled with risk, that’s why it’s always important to speak to someone like a financial adviser or investment broker first so you understand the risks.

Need support with your retirement planning?

We can help. Speak to one of our friendly advisers today and have a commitment-free chat about your retirement plans. 

How much do you need to save for retirement?

Whatever your age and ambitions, creating a detailed plan of action will help you work out a target retirement income – and keep everything on track. Key elements to build into this plan include:

  • When you intend to give up full-time work.
  • The size of the pension pot you’ve built up through a workplace or personal scheme so far. This could be either through a defined contribution or defined benefit plan.
  • The state pension payments you’re likely to receive, based on your National Insurance record.
  • How you intend to withdraw your savings during retirement. Your options include an annuity and income drawdown.
  • Any plans you may have for your retirement years.

What lifestyle do you want in retirement?

Your lifestyle goals are also key when calculating an ideal pension income. It’s easy to categorise these:

  • Essentials – aim to cover bills and important costs.
  • Comfortable – all essentials are covered with extra to enjoy for one-off holidays and gifts.
  • Luxury – your essentials are covered and you can enjoy the finer things in life, with less financial restrictions.

Saving from an early age and keeping a close eye on your retirement plan are essential if you’re aiming for a comfortable or luxurious retirement. This might include enrolling in a workplace pension, setting up a regular savings account and building up your qualifying years as part of your National Insurance.

How do you budget for one-off costs?

As you get older, your outgoings gradually change. Childcare costs, mortgage payments and commuting fees will be a thing of the past for many people. However, these may be replaced by car repairs, increased utility bills or other changing costs.

New expenses could also start to arise, including medication bills, higher insurance premiums and mobility costs. You may also want to contribute towards your grandchildren’s education and wellbeing.

Carefully listing all the expenses you’re likely to face will play an important role in your retirement plan.

Calculating what you need for retirement

Once you’ve reviewed your savings, lifestyle goals and projected costs, a pension calculator could add some concrete figures to your retirement plan. By entering a few details about your pension savings, these tools can give you an estimate of your likely income after you retire.

Using this figure the pension calculator provides as a base, you can start budgeting and preparing for your golden years.

Learn more about the pension calculator from MoneyHelper.

Need advice on how to make the most of your retirement?

At LV=, we’re passionate about helping you prepare for retirement. That’s why we offer our retirement advice service to assist you with understanding the road to retirement. Why not start with a quick chat to see how we can help? Get in touch.

FAQs to help you prepare for retirement

How much pension do you need to live comfortably?

The definition of a comfortable retirement differs from person to person and depends on things like the number of holidays you plan to take each year. However, some experts have suggested you could maintain a comfortable lifestyle with a pension income between half and two thirds of your final working salary.

How can you receive a regular retirement income?

Buying an annuity when you retire can help to convert your pension pot into a regular income. Annuities can last for a fixed term or pay you a guaranteed income until you pass away.

Will the state pension cover your retirement needs?

You’ll need more than the State Pension to secure a comfortable lifestyle during retirement. It’s only meant to be a useful top-up for your private savings, so is unlikely to cover all your expenses in later life. It’s also why there’s no limit on the number of pension products you can have.

Can you still work when you hit retirement age?

Yes, you can continue working if it suits you. Unless you work in a specialist industry, such as the army or the police, there’s no obligation for you to retire when you reach your State Pension age. That means, you can keep bringing in an income whilst claiming your pension. It’s worth noting that if you choose to do this, you may be required to pay more in tax.