When it comes to retirement planning, Britons are encouraged to start early so they can build up their desired pension pot, and retirement income. However many people are unsure what ‘is enough’.
According to Retirement Living Standards (RLS), 77 percent of people surveyed do not know how much they need in retirement.
Whilst the amount needed to retire will be unique to the individual, research by RLS shows that on average a couple requires an income of £34,000 per year to sustain a moderate standard of living in retirement.
A ‘moderate’ lifestyle provides more financial security and more flexibility. People could have one foreign holiday a year and eat out a few times a month.
Lisa Tipton, director of financial planning at New World has provided some examples of the typical annual income generated by different-sized pension pots so people can understand if what they have ‘is enough’.
What does a £37,000 pension pot give?
The average pension pot for Britons aged 55 to 66 is almost £37,000, according to figures from the Office for National Statistics.
If someone had a £37,000 pension and they took the 25 percent tax-free cash as a lump sum, they would have £9,250 to spend or save or invest elsewhere.
They would then be left with £27,750.
Their estimated annual income would then be £1,110 a year or £92.50 a month before tax, assuming they retired at age 66 (when the state pension age kicks in) and they chose to withdraw four percent a year.
If this amount is then added to the full state pension of £10,600 a year, it means their total annual income would be £11,710.
As this is within each individual’s personal allowance of £12,570, there would be no further tax to pay.
If someone decided to take an annuity with that pension pot, they could get about £102 a month, or an annual income of £1,227, according to the annuity calculator from Money Helper.
This is after taking the 25 percent tax-free lump sum, and assumes people start the annuity at age 66, are single and want an inflation-linked policy whose value increases each year line with the retail price index (RPI).
It should be noted that these are just estimates and everyone’s situation is different.
What does a £150,000 pension pot give?
If someone had a £150,000 pension and they took the 25 percent tax-free cash as a lump sum, they would have £112,500 to spend or save or invest elsewhere.
The estimated annual income would therefore be £4,500 a year or £375 a month before tax, assuming they retired at age 66 and withdrew four percent a year.
If this amount is then added to the full state pension of £10,600 a year, it means their total annual income would be £15,100.
However, as their income would be above the personal allowance of £12,570, they would be subject to basic-rate income tax of 20 percent on the difference: £2,530.
Using the Money Helper calculator, a £150,000 pot could get a monthly income of about £446 or an annual income of £5,363 with an annuity.
This is after taking the 25 percent tax-free lump sum, and assumes people start at age 66, are single and want the value to increase with RPI each year.
Britons are encouraged to speak to a financial planner before making any decisions about their money.
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