Work out your likely retirement income
As retirement approaches, it’s crucial that you work out your pension savings to make sure they are on track to provide the level of retirement income you think you will need when you stop work. Once you know this, you’ll be able to work out when you can afford to retire or whether you need to delay taking your pension.
Step 1 – Check your retirement income estimates
If you have any defined benefit pension schemes’ also known as ‘final salary’ and ‘career average’ schemes, the pension scheme trustees (those who run the scheme) will write to you several months before you’re due to retire and tell you how much pension you will receive. You will also be asked whether you would like to be paid some of your pension as a tax-free lump sum and how much you would like to take (usually up to a maximum of 25%).
Other workplace or personal pensions
When you are between four and six months from your retirement date, your pension scheme or provider will send you an information pack telling you how much money you have in your pension pot and what your options are for taking money out of them.
The information pack will also tell you how much income you could expect from your pension pot if you use it to buy an annuity.
If you are farther away from retirement, your most recent annual pension statement will give you an estimate of your pension pot.
Track down any lost pensions
If you think you’re missing an old pension, you can track it down free of charge using the government’s Pension Tracing service.
Find out how much State Pension you might receive
If you haven’t had a State Pension statement, or haven’t asked for one recently, it’s a good idea to get one. A State Pension statement will tell you how much State Pension you’re entitled to based on your current record of National Insurance contributions or credits.
The State Pension is changing in April 2016 and, depending on your age, you may not yet be able to get a State Pension statement that will estimate your entitlement based on the new State Pension rules. Read our guide on the New State Pension to find out more.
If you’re a few months away from reaching State Pension age you will receive a letter from The Pension Service telling you how to claim your State Pension.
Step 2 – Write down the key information
When you have an estimate of the value of each of your pensions, write down:
- The retirement date(s) for each of your pensions.
- How much you could take from your pension every year or which pensions you may want to defer taking. Bear in mind that your pension(s) have to last throughout your retirement. If you take more money out in the early years, you may run out of money later on.
- The likely monthly income if you were to buy an annuity. You don’t have to buy an annuity, but it’s useful to know how much you could get from one so you can compare it with other ways of taking money from your pension. You can find personalised annuity quotes using our Annuity comparison tool.
- The maximum tax-free cash you can take from your pension pot if you choose certain options. Find out the options for taking money from your pension pot in our guide Options for using your pension pot.
If you’re worried about how much money you’ll have, read our guide Ways to boost your pension in the run-up to retirement.
Using equity release to increase your income
If you do not have enough money to give you the retirement income you’d like, you may be able to use some of the equity in your home to increase it. However, these schemes can be very expensive and inflexible, and you must take advice from a financial adviser if you’re considering it. Read more in What is equity release?
Step 3 – Estimate how much tax you may have to pay
Add up all of your income estimates to work out your total income.
Everyone gets a personal tax allowance which starts from April 6th one year to April 5th the following year. In the current tax year (2016-17) it is worth £11,000. That means you can earn up to £11,000 (or receive up to £11,000 in income from things like pensions and savings) and you won’t have to pay a penny in tax.
The income amount above £11,000 is taxable, with the higher the income the more tax you’ll pay.
|Tax band||Your income||Band rate|
|Your personal allowance*||Up to £11,000||0%|
|Basic rate||£11,001 - £43,000||20%|
|Higher rate||£43,001 - £150,000||40%|
|Additional rate||Over £150,000||45%|
The personal allowance is the amount of income you can have before you have to start paying income tax. This reduces £1 for every £2 when your income is over £100,000.
The personal allowance is increasing to £11,500 in the 2017-18 tax year.
Read our guide to understand more about Tax when you’re retired.
Step 4 – Claim benefits you’re entitled to
When you retire you may be entitled to some extra benefits, or your existing benefits may be affected. Benefits you may be able to claim once you’ve reached State Pension age include:
- Pension Credit: This is designed to top up your income to a minimum level. Many people who are entitled to Pension Credit don’t claim it. Read more in our guide on the Pension Credit.
- Other benefits; These include help with Council Tax; help with heating costs and Cold Weather Payments. Find out more in Benefits in retirement.
- Attendance Allowance: You may be able to claim this benefit if you have an illness or medical condition. It’s tax free and is not means-tested and it’s another benefit that many older people don’t claim. Read more on the GOV.UK website.
Effect of retiring on benefits you’re already claiming
There are a number of benefits that you won’t be able to claim if you’ve reached state pension age (which may not be the same date that you retire). They include:
- Jobseeker’s Allowance
- Employment and Support Allowance
- Disability Living Allowance/Personal Independence Payment
If you want to check what benefits you’ll be entitled to when you retire, use one of the benefits calculators available via the GOV.UK website .
Step 5 – Don’t ignore inflation
Inflation can have a big impact on the purchasing power of your pension. What that means is that over the years the same amount of money will be able to buy less and less.
The inflation rate is currently very low. The average inflation rate has been 2% since 1997 , and it’s fallen very sharply in early 2015. However, in the 1970s, inflation was very high (peaking at 26.9% in August 1975 and it may rise again in the future.
Read more about how inflation may affect you in Inflation, what the saver needs to know.
Step 6 – Review your options and get advice
Until recently most people who have a pension where they build up a pot of money (as opposed to a salary-related pension, such as a final salary pension) bought an annuity to provide a regular retirement income for life. This is still an option, however since April 2015 you could take money out of your pension pot as you wish if you’re aged 55 and over. Be aware that if you take a lump sum this will leave you with less money to provide yourself with an income in retirement.
To understand the choices for using your pension pot, use Pension Wise – the free and impartial service backed by government. Find out more from pensionwise.gov.uk.
However, this guidance won’t tell you the best option for you at retirement, only what the options are. If you want advice about what you should do, talk to a financial adviser.
You can find FCA registered financial advisers who specialise in retirement planning in our Retirement adviser directoryopens in new window.
Find out more about your options with our Retirement income options tool.