It is very important to save towards your retirement and of course many are not saving enough. However, some retirees may not need as much as they think.
Some people, once they retire, will be paying significantly less income tax, have no national insurance (NI) or pension contributions to make, have paid off mortgages and loans, and seen their children finally become financially independent.
They may actually achieve the same disposable income levels in retirement or at least similar, even if their pension income is say half what their salary was when they were working.
Therefore, it is important to review how much income you think you will need in retirement as early as possible, to have a better understanding about how much you need to be saving now.
HOW MUCH WILL YOU NEED?
WEALTH at work has run retirement seminars for tens of thousands of employees, and has created three examples that demonstrate how individuals could achieve a level of disposable income in retirement similar to when they were working.
They are based on an active individual with no health issues, contributing towards their pension through salary sacrifice for the tax year 2015/16.
Mark has a salary of £26,000 a year and is making a 5 per cent pension contribution towards his final salary (defined benefit) scheme. He plans to have paid off his mortgage (costing £6,000 a year) and loans (£2,400 a year) by the time he stops working.
When he does retire, he will also no longer have to pay £2,820 income tax, £1,997 national insurance or £1,300 into his pension.
Therefore, to have the same amount of disposable income as he had when he was working (£11,483), Mark needs an annual pension income of £11,704, leaving a disposable income of £11,483 after tax.
Joanne has a salary of £40,000 a year and is making a 10 per cent contribution towards her pension. By the time she retires, she intends to have paid off her mortgage of £10,000 a year. She will also no longer have to pay £5,080 income tax, £3,353 national insurance or £4,000 into her pension.
Therefore, to have a disposable income similar to what she had when she was working (£17,567), she needs an annual pension income of £19,309, which will leave her with a disposable income of £17,567 after tax.
John has a salary of £60,000 a year and is making an 8 per cent contribution towards his final salary (defined benefit) scheme; he's also making 10 per cent additional voluntary contributions (AVCs).
He plans to have paid off his £10,000 a year mortgage by the time he stops working, and his daughter will have finished university, which is presently costing £8,000 a year.
When he retires, John will no longer have to pay income tax of £9,083, national insurance of £4,254 or £10,800 a year of pension contributions.
Therefore, to have the same amount of disposable income as he had when he was working (£17,863), John needs an annual pension income of £19,679, leaving a disposable income of £17,863 after tax.
His headline pension requirement to maintain the same standard of living as present is just under 33 per cent of his base salary.
DO NOT BURY YOUR HEAD IN THE SAND
The examples above are for demonstrative purposes only and must not be relied upon to make any calculations or financial decisions - but they do demonstrate how, once you retire, your day-to-day costs may change.
You may want to spend more on holidays, leisure and hobbies, and utilities may go up if you are at home more, but these costs, depending on your circumstances, may not rival the ones that have reduced.
It is important to ensure your savings can cover any debt, and to make sure that you are making sufficient pension contributions while you are working so that the retirement income you generate will meet your needs.
However, if the predicted income on your pension statement is much lower than expected, do not bury your head in the sand believing that you will never be able to save enough for retirement.
Instead work out how much you really will need: you may be pleasantly surprised to find that (depending on your circumstances) it is significantly less than your present income.
Jonathan Watts-Lay is director of WEALTH at work.
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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