Important information - investment values and income from investments can go down as well as up, so you may get back less than you invest.
There are all sorts of ways to generate an income from your retirement savings. Whatever route you choose, though, it is easy to feel dispirited. Even a healthy-sized pension might fail to match the kind of salary you get as a working person.
But this could matter far less than you think. Research shows that your pre-tax income can fall significantly in retirement before your lifestyle starts to suffer. Here’s why.
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Tax
When you are working, you pay income tax and National Insurance (NI) on your earnings. Once you retire, however, the landscape changes.
Firstly, no NI will be due on your pension withdrawals, which will boost your take-home pay considerably. After all, employees pay 8% NI on earnings between £12,570 and £50,270, and 2% on anything above this. (Different rules apply to the self-employed).
This means an employee on a £60,000 salary will take home £3,780 a month - or £45,357 a year - after income tax and NI. In contrast, someone taking £60,000 from their pension will receive £4,047 a month, or £48,564 a year.
And don’t forget tax-free cash. In the example above, we assume income tax will be due on the £60,000 pension withdrawal. However, most people can take a quarter of their pension completely tax free, up to a limit of £268,275.
Saving
When you are working, you are in saving mode. You are probably making regular pension contributions, and you might be funnelling money into an ISA as well. In retirement, however, you shift from accumulating wealth to spending it. This means you can enjoy exactly the same lifestyle on a lower income.
This effect is most pronounced among wealthy retirees, who tend to save a larger share of their earnings and whose working income is more likely to exceed their day-to-day spending needs.
Spending
Research suggests that some types of spending naturally decline as you get older. As such, many people can spend less but still maintain the same standard of living.
Housing is a big factor. Today, most people have paid off their mortgage by the time they retire, although this is starting to change. Work-related costs, such as commuting, also fall away. However, spending is unlikely to decline in a straight line. You might spend more on travel and other activities in the early years of retirement, for example, while care costs can rise sharply later in life.
The government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.
Our retirement specialists can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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