How does a pension affect your retirement income?
Making even small changes to your pension contributions now can have a dramatic effect on your income in the future. Here are a few key things to consider about your pension as you save for retirement.
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When you reach retirement age, it’s important that your income enables you to live the lifestyle you want to live. Making even small changes to your pension contributions now can have a dramatic effect on your income in the future. Here are a few key things to consider about your pension as you save for retirement.
The Retirement Living Standards – what income do you need in retirement?
A few years ago, the Pensions and Lifetime Savings Association (PLSA) came up with the Retirement Living Standards to help people work out how much income they might need to cover the cost of living in retirement. There are three different retirement scenarios, based on how much you would need to spend to maintain three different types of lifestyle – minimum, moderate and comfortable.
The first ‘minimum’ covers the basic expenditure needed to pay bills and everyday expenses, but it does still allow for some non-essential spending. The second ‘moderate’ assumes a bit more spare cash, while the third ‘comfortable’ allows - as it says - for greater freedom and choice including foreign holidays, leisure activities, meals out and other luxuries.
The PLSA currently state that a retirement income of £14,000 per year for a single individual (or £22,400 for a couple) is required to achieve a minimum living standard in retirement, rising to £31,300 for a moderate standard of living (£43,100 for a couple) and £43,100 per year to achieve a comfortable lifestyle in retirement (£59,000 for a couple).
As you can see, this is not an insignificant amount. However, a combination of the state pension and your workplace pension contributions can help you to achieve the level of income you want in retirement.
The state pension – a solid base to build upon
The full New State Pension is £221.20 a week, or about £11,500 a year - so without a workplace pension or an additional source of income, this is the maximum income you could currently expect to receive in retirement.
To get this full entitlement, you must have at least 35 qualifying years on your National Insurance record but you only need 10 qualifying years to start receiving a basic state pension. The amount you receive is in proportion to how many qualifying years you have worked, with each qualifying year entitling you to 1/35th of the full amount. This means that it you achieved the minimum requirement of 10 qualifying years, your state pension would give you £63.20 a week, or about £3,280 a year.
As you can see, the impact that your state pension can have on your retirement income can vary hugely depending on your employment history. However even the full amount may well not be enough to enjoy the standard of life you might like in retirement, particularly if you are single.
Your workplace pension – enabling you to reach your retirement goals
With the limitations of the state pension in mind, this is where your workplace pensions can make a dramatic difference to your retirement income. However, the amount you get can vary hugely based on how much you contribute into your pension, and how long you have been contributing for.
A large part of this is down to the power of compound returns. As you pay into your pension pot, this money doesn’t just sit there but is invested to help it grow. Over time, compounding your returns by simply leaving them invested could help you ride through any market volatility and, in time, this means you could realise total returns that could be much more that the total initial amount you invested. With this in mind, even a small increase to the amount you contribute each month could have a large impact on your retirement income.
As an example, WEALTH at Work estimate that by increasing your pension contributions by just 1%, the value of your pension pot at retirement could increase by as much as 25%. That represents a significant return on investment and could make a substantial difference to your retirement income, and the type of lifestyle you can live as a result of this.
How can you check if you’re on track?
So where does this leave you? To find out more about the PLSA’s Retirement Living Standards, and to get a better understanding of what standard of living you’ll need to meet your hopes for retirement, click here.
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