How much money will I need to retire? I’m currently in my early 50s and planning to keep on working full time at least until state pension age. However, I have the option of working part time beyond this date to supplement my income.

Bryce

Tom Selby, AJ Bell Head of Retirement Policy says:

How much someone will need to enjoy the retirement they want will depend on a wide range of factors.

As a starting point, write down your expected weekly outgoings, covering fixed costs and factoring in a buffer for any unexpected expenses.

You should also consider how much extra discretionary cash you will need to enjoy the retirement you want as this will have a significant impact on the size of pension pot needed.

Someone who has no mortgage and plans to holiday in the UK, for example, might need less income – and therefore a smaller pension pot – than someone who still has a mortgage to pay off and plans to travel the world in retirement. Equally, someone in good health planning to retire at age 60 will need a far bigger pension pot than a similar person planning to retire at age 70.

The Pensions and Lifetime Savings Association (PLSA) has developed ‘Retirement Living Standards’ which provide a useful benchmark for the amount different standards of living might cost.

For a single person, the PLSA reckons a ‘minimum’ standard of living will cost around £10,900 a year, while a ‘moderate’ living standard would cost £20,800 a year and a ‘comfortable’ living standard £33,600.

It’s worth noting that since these living standards were updated, inflation has increased and so each will need to be revised upwards. Nevertheless, they are a useful guide to how much you might need to spend in retirement.

WHAT TYPE OF PENSION DO YOU WANT?

To figure out what size private pension pot you might need to fund your retirement, you should first consider your other income sources. The state pension is the most obvious starting point for those who are aged 66 or over, with the full flat-rate state pension paying just over £9,600   per year.

This just about covers a basic standard of living in retirement but falls a long way short of a ‘moderate’ or ‘comfortable’ lifestyle.

Next, think about any other income sources you have, such as income from a buy-to-let property, a part-time job or any defined benefit (DB) pensions you might have. This will help supplement your state pension and put you in a better position to know what you need from your private pension.

Once you’ve got a firm handle on how much you need to spend, you can consider how to generate an income from your pension pot.

For those who want a guaranteed income for life and no investment or longevity risk, an annuity might be the preferred option. If you’re going down this road, you need to remember there is no going back and your income will be inflexible.

Disclosing your health and lifestyle factors to the insurance company should help to improve the income they offer you.

Alternatively, if you are comfortable keeping your pension invested while taking an income and managing that risk, drawdown might be a preferable option. Anyone going down this route needs to be clear about their investment strategy, keep costs down and review their plans regularly – at least once a year.

If you are unsure about how to navigate these options, it might be worth speaking to a regulated financial adviser who can consider your financial situation and recommend options.

HOW MUCH MONEY MIGHT YOU NEED?

The amount you need to retire will depend on a range of factors including your age, health, other sources of income and the investment returns your fund enjoys (if you opt for drawdown).

Take, for example, a 66-year-old who receives £9,000 a year in state pension income and needs to generate another £11,000 pre-tax from their private pension after taking their tax-free cash.

If we assume their income rises in line with 2% inflation and investment returns are 4% per year after charges, they might need a fund worth around £255,000 to generate the income they need for 30 years in drawdown.

On the other side of the coin, if investment returns were 4% a year and inflation higher at 4% a year, they might need a fund worth £330,000 to generate an income of £11,000 a year, rising with inflation, for 30 years.

This illustrates the challenge in figuring out how big a pension pot you will need to deliver a set level of income in retirement.

Alternatively, if a healthy 66-year-old wanted to buy a single life annuity worth around £11,000, rising in line with 2% inflation each year, they might need a fund worth £210,000, according to the MoneyHelper annuity calculator.

DEATH BENEFITS AND FLEXIBILITY

When considering drawdown versus annuity, you should consider how much you value flexibility versus certainty, and whether your income needs might change throughout retirement.

For many people, locking into a fixed income in the early years of retirement will not be desirable – especially as the rate you receive will improve as you get older. It is also increasingly common to mix and match annuities with drawdown.

In addition, death benefits are also extremely important for lots of people, and any unused drawdown funds can potentially be passed on tax-free to your nominated beneficiaries. If you buy a standard annuity, on the other hand, once you die your income will generally stop.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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