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'I'm 59 with £235k in pension pot – can I retire at the age of 65?'


Martin Lewis busts state pension myth

A pension pot of £235,000 for a mortgage free married man aged 60 is a significant nest egg, but will it grow enough over the next five years to allow him to retire at 65?

Any return on this private pension would be bolstered by the State Pension, which would be payable at the age of 67.

At the same time, his wife would also have a small private pension and the State Pension to boost household income.

The individual told This is Money that he has a salary of £62,000 and is currently paying 4 percent of this into a company private pension, which is matched by his employer.

There are some other small savings pots plus the equity held in the home the couple owns outright.

READ MORE Income tax warning for pensioners as more than 850,000 face new change

Senior couple using laptop while planning their home budget,

It is never too late to increase your pension contribution. (Image: Getty)

What is the best first step?

Seek advice from a financial planner, who can help model how much income you will need to support the lifestyle you hope to enjoy.

Typically, pensioners spend more – at least in the early years following retirement – than they had expected. Home improvements, travel and holidays are a potentially expensive priorities when older people are still fit and active.

 

How much money do I need?

Research for the Pensions and Lifetime Savings Association (PLSA) calculated a couple require a joint income of £59,000 to have a comfortable lifestyle, including luxuries such as regular beauty treatments, theatre trips and two weeks’ holiday in Europe a year.

The figure was put at £43,000 for a moderate standard of living and £22,400 for a basic lifestyle.

Should I pay more into a company pension?

This depends on what sort of lifestyle you hope to lead now and in retirement – and what you plan to pass on to your loved ones.

Without a mortgage to pay, it may be possible to increase pension contributions. The size of these contributions will be boosted by higher rate tax relief.

This means that every £100 paid to a pension, will only cost the individual £60.

It is also possible to claim back higher rate tax relief that has not been claimed previously over the past four tax years.

Employers might match your higher payments into the company scheme, giving a double boost to the fund.

Some employers also offer a salary sacrifice scheme through which you can increase your pension contribution whilst still taking home more of your pay.

 

Can I rely on the State Pension to ensure a comfortable retirement?

It is important to remember that the State Pension age is rising from 66 to 67 for those born after April 5, 1960.

Someone who is aged 60 today and then chooses to retire at 65 would need to find sufficient income to cover all their needs through to the point where the State Pension kicks in at 67.

Simon Stygall, chartered financial planner at Flying Colours, said: “This can be done in a number of ways, including using some of your pension provision to purchase a fixed term annuity until state pension age, or by flexibly accessing your pension with a combination of tax-free cash and income during this period.”

The state pension for the 2024/25 tax year is £221.20 per week, which will provide an income of £11,502.40 per annum – or £23,004.80 for a couple.

Hands elderly woman counts coins.

It is possible to claim back higher rate tax relief that has not been claimed previously. (Image: Getty)

How could I hit a target income of £43,000 for a moderate lifestyle?

With State Pension for a couple bringing in around £23,000 a year in today’s money, there is a gap of around £20,000.

It is possible to take up to 25 percent of the private company pension pot tax fee. With a pension pot of £235,000 this would currently amount to £58,750. As the pension pot grows, so this tax free lump sum rises.

It is possible to draw an income from a pension. The general rule of thumb is that an income of circa 4 per cent per annum is likely to be sustainable.

Someone with a pension pot of £235,000, who does not take out a tax free lump sum, could expect to generate an income of £9,400 a year.

Shelley McCarthy, chartered financial planner and wealth manager at Informed Choice, told This Is Money another option is to use the pension pot to purchase an annuity, which provides a guaranteed income for life.

An annuity dies with you, so if you have no widow’s benefit included, there would be nothing payable to you wife on your death.

She said someone with a pension pot of £235,000 could take 25 percent tax free – adding up to £58,750 – and use the rest to provide an income of between £8,513 and £13,183 per annum.

 

What about downsizing?

Many baby boomers are sitting on substantial property wealth in large family homes that have benefited from price spikes over the past 40 years.

As a result, the family home offers a treasure trove that can be tapped for those who choose to downsize.

However, making this step is never easy given the emotional ties to the family home. At the same time, finding a suitable smaller property might mean moving out of an area you know and love.

Should I pay more into a company pension?

This depends on what sort of lifestyle you hope to lead now and in retirement – and what you plan to pass on to your loved ones.

Without a mortgage to pay, it may be possible to increase pension contributions. The size of these contributions will be boosted by higher rate tax relief.

This means that every £100 paid to a pension, will only cost the individual £60.

It is also possible to claim back higher rate tax relief that has not been claimed previously over the past four tax years.

Employers might match your higher payments into the company scheme, giving a double boost to the fund.

Some employers also offer a salary sacrifice scheme through which you can increase your pension contribution whilst still taking home more of your pay.

 

Can I rely on the State Pension to ensure a comfortable retirement?

It is important to remember that the State Pension age is rising from 66 to 67 for those born after April 5, 1960.

Someone who is aged 60 today and then chooses to retire at 65 would need to find sufficient income to cover all their needs through to the point where the State Pension kicks in at 67.

Simon Stygall, chartered financial planner at Flying Colours, said: “This can be done in a number of ways, including using some of your pension provision to purchase a fixed term annuity until state pension age, or by flexibly accessing your pension with a combination of tax-free cash and income during this period.”

The state pension for the 2024/25 tax year is £221.20 per week, which will provide an income of £11,502.40 per annum – or £23,004.80 for a couple.

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