Funding a decent income

Whenever you start thinking about retirement planning, it is worth beginning by working out how much income you think you will need. Generally, few people need as much income in retirement as they did when they were working – the mortgage might be paid off, children will have left home, and day-to-day expenses should have fallen. However, anticipating increased leisure time might spur you to make ambitious plans for travel or family, and all these expectations need to be considered so you can set some realistic targets.


Once you have worked out how much money you need, you can begin to work out where it will come from. For example, the state pension is £107.45 per week (for 2012/13) , plus there may be money coming in from ISA investments, rent from property, or even some continued paid employment. Moving to a smaller main residence could also release some capital – although house prices can go down, as we have seen recently, so it is risky to rely on the value of your house to fund your retirement.

Once completed, you should have a much better idea of the income you need to generate from pension savings. You might already have started to save through a workplace or personal pension and, although this should be taken into account, it is likely you will still need to supplement it and build it further over the years you have left. To give you an idea, at the best current annuity rates (June 2012) – given interest rates are so low – £10,000 of annual income could cost a male aged 65 almost £200,000 , with no guarantees. If you are female or would like some inflation protection - or simply wish to retire earlier than that - the cost is even higher. The amount you need to save could therefore be considerable.

Thanks to changes in 2006, you can now invest up to £3,600 or 100% of your annual earnings (whichever is the higher) in your pension savings, subject to a maximum of £50,000 (for 2012/13) , and tax relief is available on the contributions. There is also a maximum limit on the overall size of the pension portfolio you can generate – although at £1.5m for the current tax year, there are only a few who are affected.