How much income do you expect to receive in retirement?
1. Estimate what your state pension/s will provide: The new state pension is currently £175.20 per week per person, if you have enough qualifying years on your National Insurance record. You can obtain an estimate of your state pension click here.
2. Estimate what your company & any private pensions will provide: Unless you have opted out, if you are employed in the UK and earn over £10,000 p.a. you should have a company pension set up, which you and your employer contribute to regularly. You may also have a private pension or old pensions from previous employments. You can ask your pension providers for projections of benefits to your retirement age, giving you an estimate of what the pension could provide. Make sure the nominated retirement age matches the age you actually want to retire. If you have lost track of old pensions, you can use the government’s pension tracing service: For more information click here.
3. Estimate any other income you may receive in retirement: think about what income you’ll get beyond pensions, such as rental income from any buy to lets.
4. Consider tax & inflation: pension income (other than a limited tax free lump sum) is subject to income tax, though not National Insurance, so you should bear this in mind. Tax rules are subject to change but as a starting point you should try and estimate your potential tax burden, based upon existing income tax rules. You can estimate the income tax burden using the following website, just make sure to tick the box ‘I pay no NI’: For more information click here. The other key factor to bear in mind is inflation, pension projections should include adjustments for inflation but if so, they’ll explicitly state this. Inflation throughout retirement should also be considered and whether any of your income sources have any inflation linked increases built in – this is most common with final salary type pensions.
5. Think about your timeline: thinking about your retirement timeline is crucial, and it’s useful to physically sketch this out. Start with your age now, then draw a line up to your retirement and then on to your life expectancy – as morbid as this may seem this is the period of time you are planning for. To help you visualise this the Office for National Statistics have a life expectancy calculator, and this includes your state pension age and the likelihood of living to a 100! For more information click here.
I’m 34 – so for me the chart looks like this:
If you are planning as a couple you should also put careful thought into your combined timeline – i.e. are you the same age and do you want to retire at the same time?
6. Establish if there is a shortfall: you should now be able to compare expected income against your target spend in retirement, to determine whether there is a shortfall. You can also make use of the Money Advice Service’s pension calculator, which takes you through a similar process to identify shortfalls and suggests ways to make this up – bear in mind it assumes you’ll have a full state pension & is designed for single people, not couples making their retirement plans together: For more information click here.
For more information, please contact Tom Shorland