If you’re ready to start planning for retirement, you need to think about how much income you will need and how you plan to take it.
It’s a wholly personal consideration. But you should start thinking about it as early as possible in the run up to your retirement. This will enable you to have a firm idea of whether you can retire when you’d like to. As well as, how much you’ll be able to take from your pension to fund the lifestyle you want in later life.
How much income do you need in retirement?
Determining how much income you will need in retirement depends on a few different factors. But typically, you should think about:
- Your lifestyle
- Your health
- Your personal retirement goals
As a general rule, you may need about 60-70% of your pre-retirement income to maintain your current standard of living. But this rate might be higher for those on lower incomes today, and lower for those on higher incomes. But this could change depending on things like mortgage payments, any debt and costs of healthcare.
Four things to consider about retirement income:
- Living Expenses: Consider your current day-to-day living expenses, including mortgage or rent costs, utilities, food, and transport. These costs may decrease if you’ve been able to pay off your mortgage before you retire, or you’re no longer commuting to work. But you might find that you need to cut back on some expenditure if you’ve not saved enough for retirement.
- Healthcare Costs: It’s important to factor in healthcare costs especially if you have health insurance, or may need specialist care in the future. As you enter later-life, you may want to pay for private care. This can have an impact on your retirement savings. So making sure you’ve planned for any eventuality is important.
- Lifestyle Choices: The lifestyle you want in retirement, such as travel, hobbies, and leisure activities, will have an impact your income needs. You may feel as though you’ve worked your whole life and now’s the time to splurge on adventures and hobbies. Make sure you’ve factored this into your pre-retirement income plans.
- Inflation: Inflation can impact your money by chipping away at the purchasing power of your savings over time. Planning for an annual increase in expenses can help.
Sources of Income in Retirement
Retirement income typically comes from multiple sources. Here’s a few:
1. State Pension:
The State Pension is a regular payment from the government that you can claim once you reach State Pension age. The amount you receive depends on your National Insurance contributions. The current full new State Pension is £221.20 per week in the 2024/25 tax year. And £230.25 per week from the 2025/26 tax year.
2. Workplace Pensions:
Workplace pensions are provided by employers and can be a significant source of retirement income. This is because contributions are made by both the employer and the employee. With defined contribution pension plans, the contributions are invested to hopefully grow over time. There are two main types of workplace pensions:
- Defined Benefit (DB) Pensions: These provide a guaranteed income based on your salary and years of service.
- Defined Contribution (DC) Pensions: The income you receive depends on the amount contributed and the performance of the investments. You can also choose how you take your retirement income, either through drawdown or through purchasing an annuity.
3. Personal Pensions:
Personal pensions are a different way of saving for retirement. This is sometimes called a SIPP, a Self Invested Personal Pension. They offer tax advantages in the same way a workplace pension does with the added flexibility of how and where you invest.
4. Savings and Investments:
Savings accounts, ISAs (Individual Savings Accounts), and other investments can provide additional income in retirement. Diversifying your investments can help manage risk and ensure a steady income stream.
5. Part-Time Work:
Some retirees choose to continue working part-time to supplement their income. This can also provide social interaction and a sense of purpose.
6. Pension credits
Pension credits are designed to help people with a low income. It can top up your income to a guaranteed minimum level.
Planning to Take an Income in Retirement
When planning to take an income in retirement, it's important to consider the timing, amount, and sources of your withdrawals.
1. Withdrawal Strategy:
Making a withdrawal strategy should be the very first step in your retirement planning. This will help you to plan how much you’ll need, when you’ll need it and how to get it.
It’s important to make sure that you’ll have enough money to last through your retirement.
How much you’ll need depends on the lifestyle you want to have in your retirement. You can use our retirement planner to help give you a better understanding of your needs.
There are a number of ways to take your pension income. This can be through drawdown, annuities or full encashment:
Drawdown: Taking lump sums from your pension where the first 25% of the lump sum is tax free, whilst leaving the rest of it invested.
Annuities: Using some or all of your pension income to purchase a guaranteed income.
Full encashment: When you take all of your pension as one lump sum. The first 25% is tax free. The rest is taxed at your marginal rate.
2. Tax Planning:
Understanding the tax implications of your withdrawals can help you maximize your income. Usually, the first 25% of your pension pot can be taken tax-free, with the remaining 75% subject to income tax at your marginal rate.
Keep in mind, any State Pension income you receive will count as income for tax purposes. If your total income, including state pension, is over £12,570 per year, you will pay tax on your pension withdrawals. This will be arranged by your provider when you make withdrawals.
When it comes to passing on your pension, from April 2027, any unused pension could be subject to Inheritance Tax. Your beneficiaries will also pay income tax at their marginal rate when they withdraw any inherited pension money if you die aged 75 or over.
3. Investment Strategy:
As you approach and enter retirement, adjusting your investment strategy to reduce risk and protect your capital is also really important.
When you’re in the accumulation phase, maximising returns is the priority. But when you’re in the decumulation phase, the priority shifts to retaining capital.
This often involves creating a more conservative investment strategy and opting for more investments in bonds and cash, rather than more aggressive assets like gilts and single shares.
4. Flexibility:
Things change. Life throws its curve balls. And you’ll need to be ready for all potential outcomes. Unexpected expenses or changes in your health can impact your retirement savings. Having a mix of income sources can provide this flexibility when you need it most.
Your pension is designed for later life. When you save into a pension, the value of your investment could fall as well as rise and you could get back less money than you put in. You usually can’t access your pension until age 55 (rising to 57 from 6 April 2028). Tax rules can change and depend on your personal circumstances.
With a Virgin Money Pension you can take your pension savings as one lump sum, with 25% of it tax free. To access your pension another way you'll need to transfer your pension to another provider. We won't charge you to do that.
This article can give you helpful tips, but it isn’t financial, or tax advice. If you’re not sure if something is right for you, you should speak to an Independent Financial Advisor.