Pension savings: how much income do you really need in retirement?

A relatively comfortable retirement may not cost as much as you think.

It’s not uncommon to hear warnings about how ill-prepared us Brits are for retirement.

A recent study from a leading pension provider found that more than one in five people (22%) believe they will never be able to stop working, such is their lack of pension planning.

And while it’s important that we all make the effort to squirrel away cash as and when we can, it can be all too easy to get discouraged about the results. Looking at a private pension pot which is only forecast to deliver a £10,000 annual income is not exactly going to conjure mental images of a comfortable retirement.

However, the reality is that you may not actually need as much in retirement as you initially fear.

It’s unquestionably the case that the sooner you start your pension - even if only saving modest amounts - the better off you’ll be. The longer that money is invested, the harder it is working at generating a return for you to enjoy in retirement.

The tax situation

Tax is always an important consideration no matter what stage of life you’re in, but it’s particularly true once you come to retirement.

First of all, it’s worth remembering that you don’t pay National Insurance on any of your pension income. As a result, more of your gross income will be making its way into your pockets, rather than those of the taxman, from the off.

On Income Tax, some people find that they drop down a band once they give up work, for example from being a higher rate taxpayer to a basic rate taxpayer.

However, it’s worth remembering that the way you access your pension cash will have a knock-on effect on your tax outlay.

Take out too much from your pot in one go for example and you may end up in a higher Income Tax band, meaning you have to pay more to the taxman than if you paced out those drawdowns a little more.

Spending is falling

Another thing to consider here is that your costs in retirement are likely to look rather different to your current outgoings.

Chances are the mortgage will be paid off, while you won’t be spending on the kids once they have reached adulthood and moved out. There might even be a time when they take you out!

Similarly, you won’t be shelling out just to get to work every day or having to worry about the additional costs that come from being employed, whether that’s buying lunch, purchasing work clothes, or whatever else.

While your overall salary may be far higher during your working life than retirement, your actual disposable income may work out similar.

Don’t overlook the State Pension

The State Pension will also play a significant role in our incomes in retirement. We don’t have a crystal ball, so we can’t say precisely how much it will be worth by the time you finish work - or rather, become eligible for it. Similarly, while it has benefitted hugely in recent years from the ‘triple lock’ which ensures it more than keeps pace with inflation, future rises may not be so generous given warnings about just how much the State Pension is costing the nation’s finances.

Every penny helps

While it’s true that you might not need quite as much as you feared in order to cover your costs in retirement, it’s important that you don’t treat that as a reason to trim back on your contributions.

A lot can change between now and retirement, and every penny you save will help when it comes to your standard of living once you give up work.

Put it this way - you don’t get too many people in old age who wish they’d saved less for their twilight years. At Brian Mole IFA Ltd we understand getting the right balance between living for today and planning for your future.

We offer meetings at your home to discuss in detail your pension position. Our advisers will spend time discussing your personal circumstances and making recommendations to benefit you and your future.