This is a very common question from our new clients. Many people have a number of disparate pension and investment plans, and it can be confusing to work out how much you have already, never mind what you’re going to need in order to retire.
The size of retirement pot you need to amass will depend on a number of factors, but the main two are 1) how much you are going to be spending each year when you retire, and 2) what annual rate of return and income you can expect from your pension and investments.
The first step then is work out what your retirement outgoings are going to be – our article How Much Retirement Income Do I Need? is a great place to start. This article explains how to work out what your income requirement is, and the factors that you need to take in to account.
Once you know your income requirement, you can follow our simple four-step process to help calculate how much you may need in income-producing assets to allow you to retire.
1. Work out what sources of income you are already expecting in retirement, such as your state pension, final salary pensions and rental income.
I would recommend that you obtain a state pension forecast from DWP (https://www.gov.uk/check-state-pension) to check what you are due to receive and when it will start.
Your latest statement from your final salary pension provider will show you what income will be paid from these schemes (and when). If you can’t find your latest statement you should give them a call to obtain the latest figures.
2. Now you know what you’re due to receive, and when it will be paid, I would recommend plotting this on to a spreadsheet, with a separate column for each year, up to age 100. This is particularly important if you have a number of future income streams starting in different years.
This will allow you see what your gross income shortfall is in each year from now (or retirement age) onwards.
3. Next you need to understand what sustainable income yield you can achieve on the funds at your disposal. The yield will be different for different asset types – you may have cash savings, personal pensions, stock market-based investments and/or bonds.
For pensions, you also need to take in to account the way in which you intend to convert these to an income. The most popular ways of doing this are to either purchase a lifetime annuity, or use flexi-access drawdown. You may find our articles on annuities and income drawdown useful.
4. When you’ve worked out the yield, you can calculate what size of pot is required to generate this level of income – but REMEMBER TAX! Pensions are liable to income tax at the normal tax rates, so if your total taxable income is more than £12,570 (2023/24) then you will pay income tax on the excess. If you are planning on using investments to supplement your income, you have to consider Capital Gains Tax as well.
This can be a complicated process, particularly if you have a variety of existing asset types and future income streams.
I would strongly advise anyone who is approaching retirement (or simply getting serious about their retirement planning) to engage a fee-based independent financial planner to guide and advise you through this process.
The financial repercussions of getting it wrong could far outweigh the cost of the advice, and may impact you for the rest of your life.
The contents featured in this article are for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
All information It is based upon our current understanding of current legislation and HMRC guidance. While we believe this interpretation to be correct, it cannot be guaranteed that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Thresholds, percentage rates and tax legislation may change in Finance Acts and bases of, and reliefs from, taxation are subject to change and their value depends on an individual’s personal circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028).
Investments carry risk. The value of your investments (and income from them) can go down as well as up, and you may get back less than you invested. Past performance is not a reliable indicator of future results. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.