Putting a price on your retirement
Discover how much you might need in retirement, and how much your pension should be worth to achieve your desired income.
Last Updated: 18 July 2024
Putting a price on your retirement involves careful planning and a realistic assessment of your financial needs.
Household spending varies widely based on individual needs, which makes predicting exactly how much money you'll need in retirement, and therefore need to save for the future, hard to pin down.
In this article, we offer a guide to help you determine how much you might need in retirement, and how much your pension should be worth to achieve your desired income.
This article isn’t personal advice. If you’re not sure what’s right for you, please ask for advice. Money in a pension is usually accessible from age 55 (rising to 57 in 2028).
Assess your retirement needs
The first step in pricing your retirement is to assess your financial needs.
This involves estimating your yearly expenses and understanding how they might change over time. It’s likely that your spending habits will change as you reach retirement age.
Evaluate your current spending and decide if you plan to maintain, reduce, or increase your expenses in retirement. Factors to consider include:
- Housing: Will your mortgage be paid off, or do you plan to downsize?
- Healthcare: Anticipate increased healthcare costs as you age.
- Travel and leisure: Many retirees plan to travel more, which can significantly increase expenses.
- Daily living: Consider utilities, groceries, transportation, and other daily costs.
To help you calculate what you might spend in retirement, we've provided a range of yearly spending amounts for households aged 65-74. It reflects what the lowest, middle, and highest income quintile brackets spend, on average in the UK (excluding any mortgage payments and council tax).
| UK Income Quintile Bracket | Lowest | Middle | Highest |
|---|---|---|---|
| Yearly Spending | £12,678 | £26,551 | £43,904 |
What does my retirement savings pot need to be worth?
Once you’ve worked out how much income you might need or want in retirement, it’s important to understand what your retirement savings will need to be worth to achieve this level of income.
Many households will receive some State Pension, but it’s unlikely to be sufficient on its own. Therefore, it's essential to calculate how much additional savings you'll need to cover any shortfalls. Your retirement savings pot can include pensions and investment accounts. Here's a closer look at what you might need.
- Current Full State Pension: The new full State Pension is currently £11,502.40 per person. For those eligible this covers the lowest quintile spending. However, for those whose spending would fall in the middle or highest spending brackets, they will need additional savings to make up for any shortfalls.
- Middle Yearly Spending: To cover £26,511 in yearly expenses, you might need an overall retirement pot of around £89,000 per household. This is in addition to the full State Pension for two people.
- Highest Yearly Spending: For £43,904 in yearly expenses, your overall household retirement pot should be around £523,000 per household. Again, this is in addition to the full State Pension for two people.
These figures assume a 4% annual withdrawal rate from your investments. They don't take into account tax.
Strategies to bridge any gaps
To make sure you achieve your spending goals in retirement, here are a few strategies you can take.
Take advantage of employer contributions
Many employers will pay contributions set at the auto-enrolment minimums, but some will pay in more if you do. This is called employer matching and it’s a great way to significantly boost your pension.
Claim your tax relief
Tax relief is set at your marginal rate of income tax. If you’re a basic-rate taxpayer, for every £80 you pay into your pension, the government will top it up to £100. If you’re a higher or additional-rate taxpayer, you can claim up to an additional £20 or £25 in tax relief via your tax return. Limits apply.
Tax rules can change and their benefits depend on your circumstances. If you’re a Scottish taxpayer, tax rates and bands differ, and so different rates of tax relief apply.
How much tax relief can I get?
Make the most of your pension allowances
Most people can contribute the lower of their annual earnings or £60,000 to their pension every year and get tax relief. But if you haven’t used up your full allowance in the last three tax years, you might be able to carry forward this unused allowance and pay more into your pension.
To carry forward unused allowances, you need to have been a member of a registered pension scheme in the tax years from which you’re carrying forward. If making a personal contribution, you also need to have earnings of at least the total amount you want to contribute. For example, if you want to contribute £100,000 using carry forward, then you need earnings of at least £100,000 in the current tax year.
Make the most of your ISA allowance
An ISA offers another tax-efficient way to save for retirement. With tax-free growth and withdrawals, ISAs can complement your pension savings and provide additional financial security in retirement. There are several different ISAs to choose from.
A Lifetime ISA (LISA) is designed specifically for retirement savings and first-time homebuyers. You can pay in up to £4,000 each tax year. The government adds a 25% bonus to your contributions, up to a maximum of £1,000 per year. You can open a LISA aged 18-39, and you can continue to contribute until you turn 50. Withdrawals can be made without penalty after age 60 or for an eligible home purchase.
A Stocks and Shares ISA allows you to invest in a wide range of assets, including shares, bonds, and funds. Investments grow free of UK capital gains tax and income tax. A Cash ISA is an account where you can earn interest free of UK income tax. It’s a lower-risk option suitable for those who prefer not to invest in the stock market.
Remember that inflation erodes the future spending power of money. Over a period of five years or more investments usually give you a higher return compared to cash. Investing for longer also increases the likelihood of positive returns. However unlike the security of cash, investments can go down as well as up in value, so you could get back less than you put in.
More on Stocks and Shares ISAs
