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5 Tips to Help Calculate Your Retirement Income

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During your career, working out your income is usually straightforward. For most people, their main source of earnings will be their salary and possibly other income-generating assets, such as dividends, interest and rent from e.g. Buy-To-Let properties.

When you approach retirement, however, it can be strange to think about bringing in regular earnings without going “to work”. Yet it’s important to understand how different income sources work when you finally do retire, to help ensure you can achieve the lifestyle you want.

In this article, we’ll be outlining five tips to help you work out what your retirement income will be. Please note that this content is for information purposes only, and does not fully cover the entire subject. It should not be taken as financial advice which should be sought before any action is taken.

To receive personalised, independent and regulated financial advice for your own situation, please speak to one of our independent financial advisers.

#1 The State pension

Most British people will get an income from the UK government when they retire, in the form of the state pension. It’s not the same for everybody, however, so it’s important to work out exactly what you will be entitled to.

The state pension is complicated because the rules governing the whole system changed on 6th April 2016. If you reached your own “state pension” age before this date, then you should not be impacted by these changes.

You can work out your state pension age using the Government’s free online tool here.

If your state pension age is after 6th April 2016, then you are entitled to £168.60 per week (about £8,767.20 per year) under the full new state pension. Getting this amount assumes that you meet certain criteria, and you may get more or less depending on your own situation.

For instance, one of the conditions for receiving this amount is that you must have put at least 35 qualifying years’ worth of National Insurance contributions into the system. You must also have put in at least 10 years of NI contributions to get any state pension at all.

If you have ever “contracted out” of the state second pension (or previous to that, the State Earnings Related Pension Scheme – SERPS) a deduction will be made from your pre-2016 entitlement, though this could be offset by contribution years since 2016,

One important thing to note at this point is that each person can build up their own state pension. For instance, if you are married then you and your spouse could each theoretically bring in £8,767.20 per year from your full new state pensions (i.e. £17,534.40). Bear in mind, however, that quite often one or both spouses might be missing some qualifying years – perhaps due to time taking out of their careers to look after children. Speaking with a financial adviser will help you plan a strategy here, to make the most of your state pension entitlements which may include consideration in making voluntary national insurance contributions or even delaying so the pension is increased when taken.

#2 Your workplace pensions

The government is not the only avenue for you to get retirement income. You can also build up an income via your employer, as well.

There are two main types of workplace pension. The first is called “defined contribution”, and involves building up a “pension” pot of money during the course of your career (which you can then access after the age of 55). As of 6th April 2019, the auto-enrolment rules require both you and your employer to contribute to your workplace pension. You must put in at least 5% of your salary, and your employer 3%.

The second type of pension is called “defined benefit” (sometimes called “final salary”), and here your employer promises you a certain income from their sponsored scheme when you retire. Usually, the precise amount you get depends on certain factors such as your years in service, your salary during employment and the scheme’s “accrual rate.”

It is possible that you might have both types of pension or multiple pots from separate jobs throughout your career. Consequently, it’s important to track all of them down and review them with a financial adviser.

Moreover, working out your retirement income from either type of pension is rarely simple. For instance, the money from your defined contribution pension could be used to buy an “annuity” (i.e. a guaranteed retirement income from an insurance company) or be used for “income drawdown”, which keeps your money invested even as you take an income from it.

Many different income levels can result from the various options, so it’s important that you seek independent financial advice to ensure you put in place the best arrangement for yourself.

#3 Your personal pensions

It is quite possible that you opened-up your own pension at some point, outside of your employer, such as a self-invested personal pension (SIPP). It’s not uncommon for self-employed people to do this, for instance, as they have no access to a workplace pension scheme.

If so, then you might have a significant pot of money which you could combine with your other sources of income to boost your retirement finances. Again, speak to an independent financial adviser about how to make the best use of this pot, bringing it effectively into your wider retirement strategy.

#4 Other sources

Pensions are not your only possible income stream in retirement. If you have one or more properties to rent out to tenants, for example, then these can provide a strong monthly income.

If you own shares in a company, then money generated from dividends can go a long way towards funding your desired retirement lifestyle.

It can be tempting to want to rely on your property or the sale of your business to pay for your retirement, but these strategies often carry high risk as they usually involve putting all of your investment eggs into one basket. We recommend that you discuss your plan with a qualified financial planner during an initial consultation at our expense, to make sure your strategy protects your future.

#5 Final considerations

The above outline some of the most important, common ways to generate a retirement income. However, these are not exclusive and each one plays out differently for each person depending on their own financial situation and goals.

Moreover, working out your retirement income is only one part of the picture. To devise a strong financial plan, you also need to be aware of what your outgoings are likely to be – and whether your income will cover these. You need to factor in how inflation and tax might erode the spending power of your pension pot or other income streams.

To discuss these matters in more detail, we invite you to get in touch to arrange an initial no-commitment financial consultation with a member of our team here at Castlegate.