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How much income do you expect in retirement?

How much income do you expect in retirement?

Category: Retirement

Updated: 14/01/2015
First Published: 14/01/2015

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Whether retirement is a long way off or rapidly approaching, you've probably got some idea of how much income you'd like in your post-work years. The question is – is it realistic? You want to strike the right balance between being comfortable and not letting your pension pot run dry, but that can sometimes be difficult to get right. So, just how much do you expect?

Retirement income expectations at six-year high

According to research from Prudential, those who are planning to retire this year anticipate an annual retirement income of £17,000, meaning they're expecting to be nearly 8% (or £1,200) better off than those who retired last year. It shows that retirees are becoming increasingly optimistic about their potential income, with the £17,000 figure being the highest seen since 2009, when retirees expected an income of £17,800 per year.

This suggests that pre-retirees are becoming increasingly confident about their finances, with wider economic improvements starting to have an impact. This positivity has arguably been helped by the pension reforms, which will put retirees back in control of their pension pots, but it's important to remain realistic. As Vince Smith-Hughes, retirement expert at Prudential, says: "The rule changes don't alter the basic principle of needing to secure an income that will last throughout retirement. The best way to secure this is for people to save as much as possible as early as possible in their working lives."

Will it last?

So, despite these positive expectations, it's important for those approaching retirement to remain cautious and plan ahead. There are even fears that such positivity may not ring true in reality – and there are concerns that a large number of retirees could run out of cash when they're older.

Being able to secure £17,000 per year in retirement is no mean feat, usually requiring a combination of a private pension, investments and the state pension, so many pensioners could find they're not quite able to achieve that goal. In fact, calculations from Age UK show that even those with above-average pension pots could face difficulties in later life – if someone with a £29,000 pot withdrew £3,000 a year from the age of 65, their pot would run out when they were 75 (based on returns of 3% on the remaining savings).

If the annual withdrawal increased by the rate of inflation, people could potentially run out of money by age 74, and even drawing £2,000 per year would mean the pot would run out by age 81. Of course, this is based on an income drawdown scenario and not annuities, which provide a guaranteed income for life, but with many people potentiallyturning away from annuities when the new freedoms set in, there are concerns that more pots could be emptied – leaving many reliant on the state.

Don't underestimate

It's a sobering thought, and one that's brought into even sharper focus with the finding that some people drastically underestimate how long they'll have to make their pensions last. Aegon found that 12% of those surveyed believe their pension income will need to last just 10 years, when in reality it could be far longer – particularly if people take advantage of the new freedoms and start accessing their pension savings early, something that 16% plan to do.

There's a definite fear that people may underestimate how long their pension needs to last, which could mean that people outlive their savings. However, some are more pragmatic, with the majority of people intending to wait until the age of 62 before accessing their pension, expecting that it'll need to last around 19 years. This is far more realistic, particularly given that average life expectancy is currently 81 years, but the findings still highlight how important it is to be prepared – and to make proper calculations.

David Macmillan, of Aegon, commented: "The new pension freedoms give people far greater control over their savings and should be welcomed, but it's difficult to know how many are going to be tempted into spending money they may need at a later date. Even if the numbers who may overspend are relatively small, it's still worrying as the state pension is designed to provide a basic level of income rather than a comfortable retirement, and most people will not want to rely on this alone.

"It's crucial that the pensions industry and the Guidance Guarantee make it clear to people that there are risks to drawing an income too soon, and emphasise the importance of having a long-term retirement income plan."

The importance of planning can never be underestimated, if you want to have a comfortable retirement and stand a chance of reaching your retirement expectations, make sure to start early – save as much as possible from as early as you can, be realistic with your goals, and speak to a professional who can help ensure your pot won't run dry too soon.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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