Do you know how much income you’ll have when you retire? Will it be in line with the average retirement income in the UK? How well will it stack up against what you currently earn?
Avoid falling into the trap of just looking at the numbers. Instead, think about what it will mean in terms of spending power. Will an average monthly retirement income in the UK cover your essential outgoings and leave you with enough disposable income? You could be surprised, so we’ve published this blog to put you on alert.
|⌛ What is the earliest I can retire?||Age 55|
|🧮 How can I estimate my retirement income?||Use a pension calculator|
|🤔 What are my pension options in the UK?||Workplace pensions, private pensions, and the state pension|
|🗓️ How to plan your retirement income?||Check when you can retire and receive your pension, find out how much pension you could get, increase your pension, look for other financial support and help, and decide when to retire.|
What is the average UK retirement income?
According to Pensions Age, a leading pensions magazine, the average retirement income in the UK, after accounting for housing costs, rose to £349 per week in 2021/2022. The figure represents a decrease of £27 per week over the previous year.
Pensioners under 75 receive an average weekly income of £389 per week after housing costs are deducted, whereas those over 75 receive only £322. The Department for Work and Pensions in the UK surmised that workplace pensions play a significant role by increasing the average pension in the UK per week by around 11.8%.
How does average retirement income compare to average earnings?
Foreigners see Brits as somewhat reserved, and they are quite right in many ways. Unless you’re a bragger, many subjects get less of an airing, and salary is one of them. Consequently, many Brits are unaware of how their income compares to the national average.
But, when we talk about the average retirement income here in the UK, your annual income during your working life is an integral part of the equation when putting things into perspective vis-à-vis retirement planning and your financial goals. So, let’s have that discussion.
According to the ONS (Office for National Statistics), the average pay per single person for those in full-time employment in the last tax year was £640 per week. If you then take the average monthly costs of renting and buying a property (as published by the Lloyds Banking Group), it costs £759, or roughly £189 per week to buy, and £874 per month or around £218 per week to rent.
If you take the average weekly earning figure of £640 and deduct the housing costs, you’re left with £451 per week if you’re buying and £422 per week if you’re renting. Then, you’ve got your everyday living costs – food, heating, light, car and council tax, insurance, etc.
In addition, consider investing as much as possible for your retirement years, as the average retirement income in the UK probably wouldn’t secure the lifestyle in retirement to which you aspire.
Is the average retirement income different for couples?
The average retirement income UK figures quoted above are for an individual. So, what do we get if we look at the situation from a couple’s point of view?
According to the Gov.UK website, the average pension in the UK per week per couple was £511 in 2021. Of this amount, 37% comes from a couple’s combined state pensions, and 35% comes from occupational or workplace pensions.
Calculating how much money you’ll need for your retirement
According to Social Market Foundation, people here in the UK, aged between 50 and 64, will, on average, be 58% short of what they need in terms of pension and lifetime savings to enjoy a moderate retirement income.
Having reviewed the average UK pension in the UK per month and per week, it is plain to see that whether you are a single person or a couple, to attain a comfortable retirement income, you’re going to have to create one or more private pension schemes that will give you the size of the pension pot you need.
Local finance advice website shows the predicted size of the pension pot if you start investing at various ages. For example, it shows the average pension pot at age 40 in the UK being £112,000 and the average pension pot at age 55 in the UK being £61,897. But, as far as the average size of pension pots in the UK goes, they are woefully short of what you need.
To achieve a comfortable income in retirement, a couple needs a pension pot of £154,700 (assuming they have no other pension savings). As a couple, if you aspire to have a luxury retirement, you’ll need a pension pot of £442,020. The table below shows how much you’ll need to invest in your pension to achieve those levels at various ages.
|Age 20||Age 30||Age 40||Age 50|
Your preferred retirement age
On October 1st, 2011, the UK government abolished the default retirement age. Subsequently, you are entitled to choose your own preferred retirement age. But, of course, it prompts the question, how much do I need for retirement, a question that will then lead to the size of the pension contributions you’ll need to commit to.
Hoping to retire at age 55
In April 2015, another pension reform was enacted, allowing people to withdraw 25% of their pension pots tax-free. This reform also made people stop and think about the possibility of retiring at 55.
Are you one of those who want to know how to retire at 55? If you are, you should know what the average pension pot at 55 in the UK at the moment is.
According to the FCA, the average UK pension at 55 is £61,897, as mentioned earlier.
If you were to draw just 4% of this size of pot per annum, which would be a little under £2,500, it would last until you are around 79. The current new state pension is a little over £9,600 per annum, and you would only have a combined retirement income of £12,100 per year. Double that for a couple, and you are only talking about a retirement income of £24,200. That’s only going to support a pretty frugal lifestyle.
To avoid getting caught in the retirement poverty trap, you need to do some careful pension planning to ensure you end up with considerably more than the average UK pension pot at retirement. The Moneyfarm pension guide is full of good tips that can help.
Tax Implications of Retirement Income
Understanding the tax implications of retirement income is essential for anyone planning for their golden years. In the UK, various sources of income are subject to different tax rules, which can significantly impact the amount of money available to retirees. Average retirement income often includes pensions, Social Security, and investment returns, each with its own tax considerations. For example, state pensions are taxable, while some private pensions may offer tax-free lump sums.
Personal allowances and tax bands also play a role, and understanding how these apply to your specific situation can help you plan more effectively. By considering the tax implications of different income sources and working with a financial advisor, retirees can optimize their income and reduce unnecessary tax burdens. It’s a complex area that requires careful planning and consideration to ensure a comfortable and financially secure retirement.
Managing your pensions
You might have accumulated several workplace pensions if you’ve changed employers several times in your working life. Some may perform better than others, and you should consider doing a pension transfer exercise to amalgamate them into the best-performing pension.
In addition to using a pension transfer to manage your retirement investment strategy, you should also review other aspects of your 50s retirement savings plan. For example, if you want to get ahead of the average UK retirement statistics, it’s a good idea to review your investments in your 50s, while you have some time to make improvements to trigger the desired effect before you’ve reached state pension age.
There is a wide disparity between the figures for the average retirement income in the UK. However, according to the ONS, the average pension pot in the UK at 65 plus is £190,000. If you are the type who is looking for a guaranteed pension income, the best way to go about it is to purchase an annuity. Using Legal & General’s annuity calculator, it works out that a £190,000 pension pot would give you a guaranteed income of around £8,730 per annum.
While annuities are great from the point of view of providing you with a guaranteed income, once you’ve sunk your funds into one, it can be difficult to get them back out again.
If you are relaxed about non-guaranteed retirement income options, there are other choices as to where to invest money to get a monthly income in the UK. Government bonds are the closest thing to an annuity from a guaranteed income viewpoint. But while these are very safe, they don’t offer high returns – certainly not as high as some types of private pensions or ISAs.
Flexible income from your pension
When the time comes for your retirement, wouldn’t it be nice to have a flexible arrangement that enables you to access your savings when you want to and take whatever amount you need with minimal fuss? If you agree, you can find out more about the flexible pension drawdown on the Moneyfarm website.
What are the sources of income for retirement in the UK?
When planning for retirement, you must ensure that you have enough funds for a comfortable living. To set yourself up financially, you should review your: state pension, workplace pension, personal pension, certain benefits and financial support, and savings and investments.
What’s the earliest age I can retire and start taking my benefits and savings?
Retirement benefits and savings can be accessed as soon as age 55 (increasing to 57 in 2028), except due to health conditions.
Can I withdraw any money from my pension?
You can purchase an ‘annuity’ that provides a guaranteed income for life or a ‘pension drawdown’ that gives flexibility on retirement income. You can take your savings lump sum or combine different options to cater to your financial needs.
*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.