How much will I get under new private pension law?
How much a private pension pays is in the control of a retirement saver. The amount depends on the answers to two key questions:
- How much cash will I need when I retire?
- How much do I need to save to pay the retirement income I want?
There is no right or wrong answer – the responses vary from person to person depending on their aspirations and income but some general rules do apply.
Government research suggests that pensioners are happiest when they have between £25,000 and £30,000 a year coming in. The starting point in working out what you can get is figuring out what you have already saved. Get a state pension forecast from the Department of Work and Pensions. From April 2017, the full state pension pays £159.55 a week to an individual – a total of £8,296.60 a year. For couple’s double the money.
Target retirement income
Subtract your total from the target retirement income and what is left is the amount that needs financing from savings, investments, and pensions. The average retired couple spends around £2,000 a month on bills, food, entertainment and holidays – that’s £24,000 a year.
Savers should target a retirement income around that figure. Take away the state pension and that leaves at least a £7,500 a year income to finance. The benchmark is assuming savings will generate a 5% to 7% a year yield, which means a retirement fund of around £110,000. That’s before taking any tax-free lump sum and considering the income tax due on withdrawing the money.
How much do you need to save?
Now, figure out how much you need to save by dividing £110,000 by the number of years to go to your desired retirement. The earlier you start, the easier reaching the target becomes – and you can even consider retiring earlier if you can accumulate the funds.
The youngest anyone can take money from a pension is on their 55th birthday. This does not mean you cannot retire earlier, just that you cannot access your pension cash. If you already have savings or a pension, knock them off the target fund amount before calculating your annual saving amount.
Don’t forget spending patterns will change as someone ages. Younger retirees will spend more time on holiday and following hobbies, while older pensioners will do less.