Home Finance Exact amount pensioners need after tax to cover essentials during retirement

Exact amount pensioners need after tax to cover essentials during retirement

A retired couple would need an annual income of £19,000 to cover essentials while a luxury lifestyle works out at £44,000.

A new analysis of incomes needed to cope with the bills in old age and the extras, such as holidays and meals out, has been compiled by experts at Which?

The study is based on the lifestyles and spending habits of more than 5,000 retirees.

The consumer champion has also identified the measures that people should be taking now to provide security in old age.

Its ‘essential’ income target of £19,000 for a couple covers spending on: food and drink (excluding meals out), housing payments (mortgage payments, rent or council tax), transport, utility bills, insurance, household goods, phone broadband, clothes, shoes and health products.

Its ‘comfortable’ income target of £28,000 for a couple includes the essentials above, plus: regular short-haul holidays, recreation and leisure, tobacco, gifts to family and friends, alcohol and charity donations.

And its ‘luxury’ income target of £44,000 for a couple covers all the spending above, plus: extended or long-haul holidays, health club memberships, home improvements, private healthcare and a new car every five years.

Significantly, these income targets are the amount Which? estimates people will need after tax had been deducted from pensions – the state pension and private pensions combined.

It has also calculated the figures for a single retiree, which come in at £13,000 for an ‘essentials’ lifestyle, £20,000 for a ‘comfortable’ existence and £32,000 for ‘luxury’. Again, these are the post tax figures.

It said the figures for single people may seem high compared to a couple. But it explains this is because many expenses – such as council tax, energy bills and insurance premiums – are not simply halved when you live alone.

Which? said that a combination of the state pension and private pensions, which you can access when you turn 55 (rising to 57 from 2028), are the building blocks of most people’s retirement income.

State pension

You will qualify for payments when you reach 66, but this is scheduled to rise to 67 between 2026 and 2028.

In 2024-25, the full level of new state pension (for people who reach state pension age on or after 6 April 2016) is £221.20 a week (£11,502.40 a year), but not everyone gets that much.


Final salary pension

If you have a final salary (also known as defined benefit) pension, you will receive a guaranteed income, which is calculated based on your length of service and your earnings while you were working. Deduct tax and you should have a good idea how close you are to your target amount.

You should receive annual updates telling you how much you can expect to get.


Defined contribution pension

Defined contribution pensions are the most common type of private pension. You (and your employer, if it’s a workplace scheme) pay money in, which is then invested.

The amount you get when you retire depends on how much you have contributed, how well the investments have performed, and how you decide to access your pot.

Your options for accessing this money are:

Buying an annuity, which guarantees an income each year for life.

Pension drawdown, where you leave your pension invested and take income as you need it.

Taking lump sums


How much do you need to save to reach your retirement income target?

The targets are designed to give a better idea of how much you might need to spend each year in retirement.

The next step is working out how much you’ll need to save in your pension to generate the gross (before tax) annual income you want.

Which? estimates that a single person aiming for the ‘comfortable’ income target of £20,000 a year would need £173,000 in the pension pot if they opt for drawdown. It puts the figure at £182,000 if they opt for an annuity.

A couple aiming for the ‘comfortable’ income target of £28,000 a year would need £115,000 in their pension if they opt for drawdown and £131,000 if they opt for an annuity.

These drawdown figures are based on a saver withdrawing all their money over 20 years from age 65, and assume investment growth at 3 percent, inflation at 1 percent and charges of 0.75 percent.

Annuities are a more expensive option than drawdown because they produce a guaranteed income for life which might stretch beyond the average 20-year retirement.


When should you start saving for retirement?

The earlier you can start saving for retirement, the better.

When you pay money into a pension you benefit from tax relief. If you’re a basic-rate taxpayer, this means that a £100 contribution is boosted to £125. Thanks to tax relief and investment growth, any contributions you make today are likely to be worth much more by the time you retire.

Under pension auto-enrolment rules, the minimum total contribution for a workplace pension scheme is 8 percent of your ‘qualifying earnings’ – made up of 5 percent from you (including tax relief) and 3 percent from your employer.

You can opt to pay in more than this and Which? says this is a great idea if you can afford to do so. Some employers will match higher contributions.

Which? offers a free pension calculator to offer a better idea of how much a pension pot might be worth at retirement, and how much income this could give you.

Details can be found here.


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