How much retirement income will you need?


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How much retirement income will you need?


How much will you need as a retirement income?

One size does not fit all

Final salary pension schemes, which have now largely disappeared from the private sector landscape, used to target pension benefits equal to a particular proportion of the last year’s earnings for long-serving employees – typically two thirds or a half. In practice, that target was rather arbitrary because it ignored both the impact of tax, particularly relevant for higher earners, and the benefit of state pensions, which is proportionately more important for low earners.

A better estimate

The Department for Work & Pensions (DWP) has put its mind to finding a more accurate target for income in retirement. It has arrived at a ‘replacement rate’ as a percentage of pre-retirement earnings (adjusted for inflation) between age 50 and state pension age. For each given band of earnings, the replacement rate is meant to allow a person ‘the same broad living standards in retirement’ as they enjoyed when working.


earnings band

Replacement rate


Less than £12,200 80
£12,200 – £22,400 70
£22,400 – £32,000 67
£32,000 – £51,300 60
Over £51,300 50

A missed target

The DWP’s calculations were designed to help it assess the extent to which the government’s two major pension reforms would reduce the number of people facing an inadequate retirement income. The single-tier state pension, due to be introduced in 2016, and automatic enrolment, being phased in over the next five years, are both radical new approaches to retirement provision which, on the face of it, should make a major difference.

However, the DWP’s computations suggest that, based on “cautious assumptions”, the reforms will only reduce the inadequate retirement income population by one million to 12.2m. In all age bands, between roughly 40%-45% will not reach their replacement rate, although the reforms do reduce their shortfall.

The DWP says that “Those who continue to face inadequate retirement incomes tend to be concentrated in the moderate and higher income groups, who need to save privately in order to ensure that they can maintain their living standards. Income from private pensions makes up a larger proportion of total retirement income for higher earners; typically contributing just under half of total income (whereas for those with lower earnings it typically contributes around 30%, with state pension income being relatively more important).”

Top to bottom…

If you fall into that higher earner category and think, “it won’t happen to me”, then the DWP has an example that will give you pause for thought. Its modelling shows that “of the richest 20% of working age people, around 7% are expected to end up in the poorest 20% of people in retirement if they do not act to avoid such a shortfall in their income.”


The government’s pension reforms are no panacea, particularly if you are self-employed and thus excluded from automatic enrolment and the benefit of employer contributions. As the DWP’s calculations spell out, what matters for higher earners is adequate provision over and above  the state-driven basics.


Why not ask us for a retirement review today and see where you are in terms of the replacement rate?