Manage your finances to sail serenely into retirement

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From 7 April this year, the full State Pension was boosted by an inflation-busting 4.1 per cent to £230.25 per week. That’s £11,973 per annum at age 66 for those who qualify.

The increase is appreciated, but this level of income may not be adequate to fund a decent standard of living in retirement.

And yet, according to 2024 research conducted by Aegon, more than 95 per cent of UK retirees claim to rely heavily on their State Pension income – a sobering thought.

HOW MUCH RETIREMENT INCOME WILL YOU NEED?

The answer is clearly much more than the State Pension, but how much more?

The good news is that we are near the start of the financial tax year, which means annual investment tax relief allowances are available again. Especially those designed to boost your retirement pot, where you can invest up to £60,000 this tax year and claim tax relief at your highest marginal rate.

So this is the perfect time to ask yourself that crucial retirement income question, but can you provide an accurate answer? According to research by the Pensions and Lifetime Savings Association only 23 per cent of people in the UK are confident that they know how much they need to save to provide them with the retirement lifestyle they desire.

If your financial planner has invested in a cash flow modelling system, then this isn’t a problem as they can provide you with all the guidance you need. This modelling can help you accurately calculate the cost of funding your chosen retirement income.

This calculation is vital. It helps you create a detailed and accurate financial plan which allows you to best use your current income and growing wealth both now and well into your retirement future.

Such a system can also alert you to when remedial action needs to be taken to keep your plans on track.

According to the Office for National Statistics, the average value of a private pension fund in the UK today is £81,000. Using the conservative 4.6 per cent yield that Aegon used in their 2024 research, that would add just £3,726 to the State Pension raising the annual retirement income to £15,699.

That is just 36 per cent of the £43,100 level which is described as “comfortable ” by the Pensions and Lifetime Savings Association.

Its definition of a comfortable retirement lifestyle is one where your annual holidays would consist of one two-week Mediterranean trip plus three long UK weekend breaks, and the ability to afford to replace a car every five years.

It would represent a retirement income that is just £5,670 a year more than the 2024 UK average salary of £37,430.Clearly, you will need to get your sums right now to better that level. But, without access to a cash flow model, how can you accurately calculate the pension pot size you will need to achieve your retirement income objectives?

Why not keep your retirement income target simple and aim for, say, double the Pension and Lifetime Savings Association’s comfortable lifestyle level?That would equate to an annual retirement income of £86,200, including your full State Pension. It would immediately take you high into the top 10 per cent of income earners in the UK, and would certainly fund a more “luxurious” lifestyle in retirement.

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Sean Lowson | Supplied

BUT CAN YOU AFFORD IT?

According to the same 2024 Aegon research, a pension pot of about £250,000 would be needed to provide you with just the same level of income as the State Pension for that year, £11,500 (based on an annuity escalating with inflation).

An annuity may not be the best solution for everyone, and you should certainly discuss all your alternative retirement options with your financial planner before making any decisions.That said, this is still a useful rule of thumb to provide you with a simplified formula to help you estimate the fund value you might need.

Assuming receipt of the full State Pension provision of £11,973, you would need an additional retirement pot of around £1.6 million to reach a retirement income of £86,200 per annum, rising with inflation.

This formula is obviously a very much simplified calculation, but without such ball-park estimates you cannot gauge whether your current retirement dreams are fact or fiction.

As global trade tariff uncertainty and conflicts rage on, further investment fluctuation is inevitable. There is also the possibility that future budgets may see Chancellor Rachel Reeves tinkering with some of the significant tax relief benefits your pension currently enjoys.

So, it is clearly vital to get your retirement plan on a realistic track now, and a financial planner providing you with access to cash flow modelling would certainly make your task much easier.

Find out more here

About our Partner Waverton Wealth

Waverton Wealth is a straightforward and inclusive financial planning service which aims to help individuals & businesses.

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