How much income do you need in retirement?

27th November 2015

It is very important to save towards your retirement and of course many are not saving enough. However, some people may not need as much as they think according to WEALTH at work, a leading provider of financial education, guidance and advice in the workplace.

For some people once they retire, they will be paying significantly less income tax, have no National Insurance (NI) or pension contributions to make, mortgages and loans may be paid off, and children could be financially independent. Some may actually achieve the same disposable income levels in retirement or at least similar, even if their pension income is for example, half what their salary was when they were working. Therefore, it is important to review how much income you think you will need in retirement as early as possible, to have a better understanding about what you need to be saving now.

WEALTH at work has run retirement seminars for tens of thousands of employees, and has created two examples that demonstrate how individuals could achieve a similar level of disposable income in retirement as to when they were working.

The following examples* are for demonstrative purposes only and are based on an active individual with no health issues, contributing towards their pension through salary sacrifice for the tax year 2015/16.

Example 1

Mark has a salary of £26,000 p.a. and is making a 5% pension contribution towards his final salary (defined benefit) scheme. He plans to have paid off his £6,000 p.a. mortgage and £2,400 p.a. loans by the time he stops working. When he does retire, he will also no longer have to pay £2,820 Income Tax, £1,997 National Insurance or £1,300 into his Pension. Therefore, to have the same amount of disposable income as he had when he was working (£11,483), Mark needs an annual pension income of £11,704, leaving a disposable income of £11,483 after tax.

Example 2

Joanne has a salary of £40,000 p.a. and is making a 10% contribution towards her pension. By the time she retires she intends to have paid off her mortgage of £10,000 p.a. She will also no longer have to pay £5,080 Income Tax, £3,353 National Insurance and £4,000 into her Pension. Therefore, to have a similar amount of disposable income she had when she was working (£17,567) she needs an annual pension income of only £19,309, leaving a disposal income of £17,567 p.a. after tax.

Jonathan Watts-Lay, Director, WEALTH at work said, “Once you retire your day to day costs will likely change. You will often be paying significantly less income tax, have no National Insurance (NI) or pension contributions to make, and often mortgages and loans are paid off. You may want to spend more on holidays, leisure and hobbies, and utilities may go up if you are at home more, but these costs, depending on your circumstances, may not rival the ones that have reduced.”

He continues, “We want to raise awareness that you may not need the same income as you had when you were working. If the predicted income on your pension statement is much lower than expected, do not bury your head in the sand believing that you will never be able to save enough for retirement. Instead work out how much you really will need, and you may find that it is significantly less that your present income. However, it is still important to ensure your savings can cover any debt and to make sure that you are making sufficient pension contributions whilst you are working so that the retirement income you generate will meet your needs.”

*These examples are used for illustrative purposes only and must not be relied upon to make any calculations or financial decisions.

Further coverage can be found in Citywire and Money Observer.

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