We often read that the reality of our retirement income fails to meet our expectations and that we, as a population, consistently overestimate the amount of income that we will have to live on after work. But why are we overestimating this and why is there little general knowledge about retirement income? Are there ways to help us understand the reality and are there different ways of looking at retirement income that can help us better manage our savings and future income?

This article aims to help you put retirement income into perspective by comparing retirement income that comes from a private pension with retirement income derived from the state pension. Assuming that is, that the state pension is a comfortable benchmark for you to understand your retirement income. (Albeit, not necessarily a comfortable benchmark for the amount of your desired retirement income, if the tendency to overestimate is acknowledged.)

The current full state pension amounts to £8,767.20 a year. If you would like an income that amounts to this, or more, and is derived from a private pension, here are two useful examples of how much you would need to have saved by the time you finish work.

The first is to look at the income provided by an annuity, the product that takes pension savings and converts them into a guaranteed income for life. Based on current annuity rates, a 67-year-old man buying an income that rises with inflation would require pension savings of about £302,325 to provide an annual income of £8,767.20 per annum, the income from the full state pension.

Another example is to look at using income drawdown to provide a flexible retirement income from your pension savings. Income drawdown allows you to leave your money in your pension pot and take income or lump sums from it, as and when you want. Any money left in your pension pot remains invested, which may give your pension pot a chance to grow, but it could also go down in value too.

How much you can withdraw sustainably using income drawdown depends on a range of factors, including investing returns. But for the purpose of this example, pension savings of almost £214,000 would be required to recreate an equivalent state pension income. This is potentially a little less savings required than required through an annuity, but it does rely on how your investments perform over time and comes without the guarantee that the income will last until you die. It also requires you to carefully monitor and manage your investment.

Both examples are significant sums of money and it’s clear to see why people underestimate the challenge of securing an income from a pension. However, with knowledge and understanding, you can begin to feel more confident about planning your savings and future income in line with your expectations.

We have lots of useful tools and calculators that can help you prepare for your retirement. A great starting point is our financial money checkup.

The Government offers a free and impartial guidance service to help you understand your options at retirement. This is available via the web, telephone or face-to-face through government approved organisations, such as The Pensions Advisory Service and the Citizens Advice Bureau. You can find out more by going to www.pensionwise.gov.uk  or by calling Pension Wise on 0800 138 3944.

Important Information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. You cannot normally access your pension savings before age 55.This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment or action. You should regularly review your investment.


1. Rates quoted from Assureweb on 22 June 2018