Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
Nobody wants their lifestyle to suffer when they stop work. Many retirees try to replicate their salary, therefore, with income from their pension and other investments. Happily, though, you might be able to enjoy the same quality of life for a lot less.
Things tend to get cheaper when you retire. You don’t have to commute anymore and housing costs typically decline. You also benefit from some favourable tax treatment: no National Insurance will be due on your income, and you can take up to a quarter of your private pension tax free.
Another important consideration is the fact you don’t need to save anymore. You shift from accumulating money to spending it.
But how much do you actually need in retirement to avoid a lifestyle shock?
- Looking for personalised financial advice? Our advisory service can help you plan for your next step
Rules of thumb
The Pensions Commission has spent a lot of time thinking about this. Back in 2004, this team of independent experts calculated ‘target replacement rates’ as part of a landmark study into the UK's pension system. These outline how much income you need in retirement as a percentage of your working salary to maintain the same standard of living. All figures are pre-tax.
2004 is a long time ago, but the government updates the numbers every year to reflect the impact of inflation.
| Gross pre-retirement earnings | Target replacement rate |
|---|---|
| Less than £15,900 | 80% |
| £15,900-£29,000 | 70% |
| £29,001-£42,000 | 67% |
| £42,001-£67,000 | 60% |
| More than £67,000 | 50% |
Source: Department for Work & Pensions. Based on 2023 earnings terms.
As this table shows, your replacement rate depends heavily on your working income. The less you earn, the more closely you need to replicate your salary in retirement. This is because a greater proportion of your earnings will be going towards essentials like food and utilities - costs that don’t tend to dwindle with age.
In other words, if you make £70,000 you only need to aim for income of £35,000 in retirement, according to the guidelines. However, if you only earn £20,000, you should try and secure £14,000 a year.
These rules are very rough and ready. You might be planning to spend big in the early stages of retirement - or you might incur hefty care costs later in life. On the flip side, a low earner might achieve their target replacement rate but still find themselves living in poverty.
As such, it is sensible to consider the rates in conjunction with Pension UK’s Retirement Living Standards, which put absolute numbers on how much people need for different qualities of life. Fidelity also has a retirement calculator that will help you decide what kind of lifestyle you want and whether you are on track to achieve it.
Housing costs also confuse things slightly. The numbers above assume most people are homeowners in retirement, but this is not necessarily the case. For a single pensioner, covering the cost of private renting can easily require over £200,000 of extra saving, according to the Pensions Commission.1 In this scenario, your replacement rate would need to be significantly higher, as your spending would remain elevated.
Generating your income
When you’re thinking about how to generate an income in retirement, remember: not all of it has to come from your own savings. Most people rely on both a private pension and the State Pension.
On average, people receive £10,536 a year from the state pension, making it a critical source of income for almost all retirees. For an average full-time employee who earns £37,000 a year,2 the full State Pension currently represents about 30% of their pre-retirement income. This makes a target replacement rate of 67% less daunting.
How big a pension do you need?
Once you know what sort of income to aim for, you can estimate how big a pension pot you will need to achieve it. This is not an exact science, as people use their pensions in a whole variety of ways. Some use them to buy annuities; others opt for drawdown. Some take tax free cash to clear a mortgage; others leave it to grow. These factors all affect the income your pot of savings can generate.
We have imagined a simple scenario. You have a private pension and also receive average State Pension payments. You opt for a 4% withdrawal rate.
The graph below shows what sort of pension pot you could aim for, depending on how much you earned in your working life.
Someone earning £52,000 a year, for example, would need a private pension pot of around £516,600 to ensure a smooth transition into retirement. This - together with the State Pension - could generate income of about £31,200, in line with the target replacement rate.
It’s not a perfect model. The trajectory of the blue line looks odd because replacement rates change in steps across different earnings bands. The replacement rate falls from 60% to 50% at the £67,000 mark, for example. This means someone earning £70,000 appears to need a smaller pension pot than someone earning £66,000.
However, the numbers offer a general point of departure.
Are people on track?
A new report from the Pensions Commissions says that half of pensioners who retired in the 2010s fell below their target replacement rates, and 15 million working-age people are on track to miss them in the future.
Generation X - who were born between 1965 and 1980 - are most likely to miss the mark, while Gen Zs - born between 1997 and 2012 - are most likely to achieve their desired rate, according to the commission.
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.co.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.
- Read: What income might I get from a £250,000 pension?
- Read: How to deal with market crashes in retirement
- Read: Why you don’t get the full State Pension
Source:
1 Pensions 2050: Evidence and Future Priorities, The Second Pensions Commission
2 The Second Pensions Commission Evidence Pack
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Tax treatment depends on individual circumstances and all tax rules may change in the future. 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.
Share this article
Latest articles
Your 10 most-asked bond questions, answered
Expertly demystifying bonds
Becks Nunn
Fidelity International
21 May 2026
What to do when the 60/40 portfolio no longer works
Why balanced portfolios may need a rethink
Ed Monk
Fidelity International
21 May 2026
Schroder Oriental Income: a 2026 bestseller
Our Select 50 option seeking income opportunities in Asia
Nick Sudbury
Investment writer
21 May 2026
