Calculator and pennies

What income to you need when you retire?

First of all consider how much you think you will need in retirement. 

Bear in mind that your outgoings are likely to be lower. One general rule used in the financial industry is that someone aged 40 would need about 50 per cent of their current income to have the same standard of life in retirement.

This works on the basis that by the time they retire they will be mortgage-free, not supporting children and no longer spending as much on things such as commuting and other costs involved in going to work each day.

What pension funds will you have access to?

The second thing to consider is the state pension. Under the new flat-rate state pension scheme this is £155.65 per week, which is £8,094 per year.

The earlier you start saving, the better for your pension pot. 

For example, you may get a decent level of retirement income if you start in your 20s by paying in 12 per cent of your salary, but if you leave it until you’re over 40 then you might need to pay in closer to 20 per cent to get the same level of retirement income.

The good news is that the money going into your pension doesn’t just rely on you. Your employer will contribute too and many offer more generous contributions than the bare minimum that auto-enrolment pensions specify.

You also get income tax relief on your contributions into a pension scheme, meaning that you effectively save out of untaxed income. 

How much does 15% of salary deliver?  

Aviva’s pension calculator suggests a 35-year-old currently on £35,000 who saved 10 per cent of their salary with their employer adding 5 per cent for the rest of their career would build up a pot worth £283,000 by their state pension age of 68.

They are also forecast to get a state pension of about £8,000.

If they used income drawdown for retirement they could have an income of £21,000 per year from age 68 to 94, when their pension pot would run out. After this their income would drop to the state pension.

Alternatively, an annuity would deliver an income of £16,915 for the rest of their life.

Seek professional advice

Pensions are a complex area and an independent financial advisor is ideally placed to provide information and advice on the best route to take.

For more information contact Becky Hammonds on 07969 269677 or email