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How much income will you need in retirement?

Updated 22 December 2022

4min read

Nick Green
Financial Journalist

Numerous survey findings have revealed a gap between what people expect to spend in retirement and the actual income they are likely to receive. In particular, many are overestimating the state pension they’ll be entitled to. Armstrong Watson Financial Planning offers guidance on making a more realistic retirement plan.


There probably isn’t a week that goes by where you don’t read something about pensions in the press. Pension freedom has been with us for over a year and now there’s more than ever to think about when it comes to making important choices over your retirement.

A recent report by Citizens Advice suggests that many people haven’t fully understood the tax implications of accessing their pension fund. A significant number of new pensioners have ended up incurring a substantially higher tax charge than they anticipated, because they were taxed on the emergency tax code (in the absence of a tax code, this is common practice for pension scheme providers). Overpayments are subsequently refunded by HMRC, but those affected are still looking at a short-term cash-flow squeeze and a lot of unnecessary hassle – both of which can be avoided with some prior thought and planning.

Out of the pension, into the… bank account?

Rather surprisingly, some survey respondents were found to be stashing the pension funds they had withdrawn in deposit accounts. For a number of reasons, this isn’t necessarily a good move. Tax is the first reason: money held within a pension fund grows free of income and capital gains taxes, while interest on bank accounts is taxed at a person’s marginal rate once the interest earned exceeds their personal savings allowance. Secondly, with today’s low interest rates, you are unlikely to achieve any growth in a cash savings account.

The moral here is, just because you can access your pension fund, doesn’t necessarily mean that it is the right thing to do.

What kind of retirement income do people want?

Pensions are merely a method of saving and accumulating wealth for one’s retirement. Clearly, the more you accumulate, the better your standard of living in retirement ought to be – broadly speaking. Nevertheless, exactly how much you need in retirement will depend on a number of factors, which will vary greatly from person to person.

There’s a rule of thumb that a person in retirement should typically aim for around two thirds of their pre-retirement income. It’s true that many are able to manage on much less, given that their mortgage may be repaid and their children have flown the nest – but many people’s circumstances turn out to be far less neat. Over the last 18 months a number of providers have conducted research asking people how much they expect to live on in retirement. The results vary markedly.

Before pension freedom began, Fidelity Worldwide Investment reported that on average, people believed they could manage on around £11,232 per annum. Women seemed to have lower spending expectations for retirement, saying on average that they could live on £9,708 per annum, but men thought they would need £12,420.

Some months later, similar research by Prudential reported that for those intending to retire in 2015, the average desired retirement income was around £17,700 per annum, including state pension. Following the introduction of pension freedom, Old Mutual Wealth conducted a survey alongside YouGov Plc and reported that spending expectations had reached £19,700 per annum.

Reality check! Desired income vs actual income

If we consider that the maximum state pension entitlement (under the new flat rate scheme for anyone reaching state pension age after April 2016) is currently £8,094 per annum, we can see that there is a significant gap between people’s expectations and the income that the state will provide. With life expectancy continuing to increase, the job of closing this gap falls squarely on the individual concerned. The shortfall will need to be made up from private income, most of which will probably need to be personal or workplace pensions.

If we deduct the maximum state pension entitlement from the Old Mutual figure of £19,700 we are left with an annual shortfall of £11,606 per year. This is the amount that the average individual will need to source from their pensions. Going by today’s figures, a pension pot totalling £200,000 would probably be able to provide this income for just 17 years. With today’s growing life expectancies, it is clear that many people will need substantially more than this if they are to maintain their desired standard of living in retirement. Another factor to take into account is that state pension age is also rising, so in the early years of retirement people may need to draw significantly more income from their private pensions.

So how much will you need?

Many people will find it difficult to predict exactly what their income need will be post-retirement. A more practical way to approach the question may be to ask how much you can afford to put away now. For instance, if you were to save £100 a month at 3 per cent interest, then in 30 years this would have grown to nearly £60,000. This may seem a lot, but based on the suggested income requirements above, it would last you only five years or so.

So what lessons can we take away from this? Here’s our quick five-point guide.

  1. Have realistic expectations of your retirement income. If there’s no way you’d be able to save as much as you want, plan for a more modest lifestyle.
  2. Do not expect to rely on the state pension alone. Furthermore, remember that you may want to retire some years before you qualify to receive it. What will you live on in the meantime?
  3. Save as much as you can, for as long as you can. Time is money when it comes to pensions – your best friend is compound returns.
  4. When you do come to draw your pension, make sure you understand the tax implications so you don’t get hit by a huge bill.
  5. Seek advice at every key stage: setting up your pension, planning for retirement (around 10 years in advance) and at the point of retirement itself.

The more you can stick to these guidelines, the greater your chances of achieving the kind of retirement you want.

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Armstrong Watson Financial Planning Limited is the independent financial advisory division of Armstrong Watson, with offices across the North of England and South Scotland. The firm has over 30 years’ experience of helping to develop business and personal financial strategies for a wide range of clients.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.