How to calculate your projected retirement income

Thanks to auto-enrolment, more people than ever before are saving into a pension. However, with many just contributing the minimum amount, research suggests some retirement incomes will fall short of expectations. Calculating your projected retirement income while you’re still working can help you plan for potential shortfalls where necessary.

Figures from the Office of National Statistics, show that, as of 2017, almost three quarters (73%) of employees had an active Workplace Pension scheme. In comparison, just 47% held one in 2012. Auto-enrolment, which was introduced from October 2012 gradually, has led to 9.5 million people starting to save into a pension for the first time.

As a result, auto-enrolment is widely seen as a positive step for retirement planning in the UK. But many could be in for an unexpected shock when they first retire.

Around 45% of private sector employees are contributing less than 1% of pensionable earnings, and only one in three are contributing 3% or more. With contributions still relatively low, an income shortfall could be a reality for many once they give up work.

As a result, it’s important for those in their 50s, 40s and even younger to take steps to understand their projected retirement income. The earlier you understand how much you’re expected to receive once you give up work, the better your ability to take action if necessary.

However, understanding what you could receive in retirement is no easy task. There are many different factors to assess to gain an accurate picture, including:

The State Pension

For many retirees, the State Pension makes up the foundation of their retirement income. As a result, it’s a good place to start when calculating how much you’ll have to live on and enjoy life.

The State Pension age is now the same for both men and women, and gradually increasing. Assuming you qualify for the full State Pension, you’d receive £164.35 per week. If you have fewer than 35 years of National Insurance contributions, you’ll receive a percentage of the State Pension. You can check your personal State Pension forecast here.

You can also choose to defer taking your State Pension, receiving a higher weekly amount in return. For every nine weeks you delay taking the State Pension, you’ll receive a 1% increase.

The pension triple lock means the State Pension increases each year, either by the rate of inflation, the increase in average earnings or 2.5%, whichever is higher. As a result, you can expect the amount you receive from the State Pension to keep pace with the rising cost of living.

Private Pension growth

Whether you’ve just started saving into a Workplace Pension under auto-enrolment or have been contributing for years, it’s important to understand the income it could provide in the future.

The first step is to look at the value of your pension now, giving you a base to build on. When you first compare this to how much you’d like to have stored away once you reach retirement age, it can seem like an impossible target. However, once you factor in how your pension will grow and how long you’ll be contributing for, it can seem more realistic.

You should include projected employer contributions, if applicable, and tax relief on the contributions you make. On top of this, your pension will usually be invested. As a result, it will also, hopefully, benefit from long-term returns.

Projecting how the value of your pension will change over the years is challenging. After all, you can’t predict how stock markets will perform or how legislation may change. Financial planning can, however, give you an idea of what you can expect to achieve between now and your retirement date.

With this information, you’re able to look at how different decisions may affect your pension income and how much you can expect it to generate annually once you retire.

Time spent in retirement

The projected value of your Personal Pension isn’t much use in working out an annual income on its own. You also need to consider how long it will need to support you for.

When you plan to give up work and your life expectancy are crucial factors in calculating what level of pension income is sustainable for you. Retirement is getting longer, and you may even dream of giving up working sooner than the State Pension age. Whenever you decide to give up work, considering how long you’ll spend in retirement is crucial for calculating an annual income.

Of course, while important, the State Pension and Personal Pensions won’t be the only source of income for many retirees. You should also look at other income sources you can use to supplement these, such as an investment portfolio, savings or property. Pensions are a place to start when calculating your retirement income, but it should be adapted to suit you and your circumstances to create a personalised plan.

If you’d like support when calculating your pension income, please contact us. We’re here to help you get to grips with your retirement finances to help you achieve your aspirations through bespoke strategies.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

Workplace Pensions are regulated by The Pension Regulator.

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