Get by on half your current income when you retire
The company – which provides financial advice and education in the workplace – says that in some cases retirees will be able to achieve the same disposable income they had during their working life, even if their pension income is half their salary.
“Once you retire your day to day costs will likely change,” said Jonathan Watts-Lay, director at Wealth at Work. “You will often be paying significantly less income tax, have no national insurance or pension contributions to make, and often mortgages and loans are paid off. You may want to spend more on holidays, leisure and hobbies and utilities may go up if you are at home more, but these costs, depending on your circumstances, may not rival the ones that have reduced.”
This can be seen in the following case studies:
Case study 1:
Mark has a salary of £26,000 a year and is making a 5% contributions to his final salary pension. Once he finishes work he will have cleared all is debts including the £6,000 a year he is currently spending on his mortgage and the £2,400 he needs to meet his loan repayments. Once he has retired he will no longer be paying £2,820 income tax, £1,997 national insurance or £1,300 into his pension. So to achieve his current disposable income of £11,483, Mark needs an annual pension income of just £11,704, leaving £11,483 after tax – well below the £26,000 he earns.
Case study 2:
Joanne earns £40,000 a year and pays 10% towards her pension. Once she has retired she will have paid off her mortgage, reducing her annual expenditure by £10,000 a year and will no longer have to pay £5,080 income tax, £3,353 national insurance and the £4,000 she is currently paying into her pension. As a result to achieve the level of disposable income she has now - £17,567 – she’ll only require a pension income of £19,309 which will give her a disposable income of £17,567 after tax.
With the income you’ll need once you’ve retired likely to be so different to the one you’ll need once you’ve retired, it’s essential to do the maths now, to get a better understanding of how much you’ll need to save.
Watts-Lay adds: “We want to raise awareness that you may not need the same income as you had when you were working. If the predicted income on your pension statement is much lower than expected do not bury your head in the sand believing that you will never be able to save enough for retirement.”
“Instead work out how much you really need, and you may find that it is significantly less than your present income. However it is still important to ensure your savings can cover any debt and to make sure that you are making sufficient pension contributions while you are working so that the retirement income you generate will meet your needs.”
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.