How much income do I need?

The cost of living never seems to go down. So what appears to be plenty of money now may actually leave you feeling a bit squeezed at retirement. That means that accurately and realistically calculating what you'll need in the future is a very important part of your overall planning.

Work out what you'll need to live on

Determining the income you'll need to enjoy the retirement that you've always looked forward to helps ensure it'll be there for you to spend. The simple budget planner will give you a good idea of how much it will cost to support the lifestyle you'd like in retirement.

Budget planning

This simple budget planner is an editable PDF which you can download to work out a simple budget plan.

If you would prefer to make more detailed plans about your plans this Retirement Income Modeller may be better suited to your requirements. Your information will not be stored but you can print out the output report when you reach the final stage and also revisit sections of the modeller if you get to the end and find you may need to revise your plans.

Once you have completed either planner, if there's a shortfall between your forecast retirement income and your projected outgoings, you may be able to make this up by increasing payments into your pension or other savings and investments.

If the shortfall is significant, you might need to revise your plans. This could include delaying your retirement, as this can increase your pension income - or taking a phased retirement and supplementing your income by working part time. These are important decisions and we can provide valuable guidance on your options. Read on to understand some further important aspects to consider (you can click on the boxes for further information)

What about tax?

If you want to make sure you won't pay too much tax in retirement, you need to complete a Pension Coding Form. HM Revenue & Customs will automatically send this to you one month before you reach state retirement age but, if you're self-employed, you'll need to request a form or download it from the HMRC website.

Extra Tax tip

As your age changes, your tax allowance sometimes does too. Speak to your tax office and make sure you claim all your discounts and entitlements. Many investments are either tax-efficient or tax-free so double check that your money is in the best place to make the most of this.

Deferring retirement

You can choose to defer your state pension as well as your personal pension - this can have a big impact on the income that you receive.

Deferring your state pension

The government is now offering a choice of extra state pension or a taxable lump sum (payable when you make your deferred claim) if you decide to defer claiming your state pension.

When the Pension Service writes inviting you to draw your pension, you simply inform them, in writing, that you wish to start receiving your pension later, if you are receiving other social security benefits. If you are not receiving other benefits, you don't have to do anything until you decide to claim your state pension.

Deferring your personal pension

Leaving your pension fund invested means it has more time to, hopefully, grow in value, although it may also fluctuate during that time. Also, the level of steady lifetime income you can get for a given size of pension fund may also increase as you get older.

So, with the above combined, it means that deferring the use of your pension fund may increase the level of your retirement income.

However, there are potential drawbacks to deferral

It's likely you will need to make alternative provision for your income and depending on how long you live, you may not get back the amount of missed income payments that you have chosen to defer. In effect, it could take several years to ‘profit' from your decision. There are also other risks, such as your assets falling in value or annuity rates reducing because of factors outside of your control (eg interest rates or stock market volatility).

There is also the risk that by deferring your retirement, you miss out on a Guaranteed Annuity Rate (GAR). Some pensions offer a GAR, which may be connected to a specific retirement age. You or your financial adviser can find out if this is the kind of pension you have from your pension provider.

Phased retirement

Whenever the time comes, retirement is different for everybody. Some people long to escape to the countryside and start a brand-new life. Others want to stay put and take things easy. What could retirement be like for you? You might be looking forward to travelling around the world. Or perhaps you're not planning to put your feet up at all but want to work part time - using the skills you've developed during your working life, or learning new ones.

Using your savings

Using the interest earned from any savings you have is a useful way of supplementing your retirement income - especially if you are able to take only the interest earned and can avoid eating into your capital. Think about whether you have any of the following:

  • Cash (including bank or building society deposit accounts)
  • Shares
  • Bonds
  • ISAs
  • Property
  • Other savings or investments

If you're not totally reliant on your pension and the income it generates when you retire, your options might be broader. Remember to mention these when seeking any financial advice.