Using your pension for a comfortable retirement income

If you’re approaching retirement age, you might be starting to consider how you’ll fund your post-work lifestyle. A comfortable retirement income is essential for enjoying your later years with minimal financial stress. Whether you’re relying on the State Pension, your personal pension, or other investments, understanding your income options can help you approach retirement with confidence.

Pension pots explained: how they contribute to your retirement income

State Pension

The State Pension is the foundation of most people's retirement income in the UK. The government pays a monthly income to those who have contributed to National Insurance (NI) during their working years. If you're relying on the State Pension for part of your retirement income, here are some things you should know:

• The current State Pension age in the UK is 66, but is set to rise to 67 between 2026 and 2028.
• Your NI record determines how much you receive, but payments are capped at a maximum weekly amount.
• While the State Pension offers a reliable base, many retirees supplement it with personal pensions or savings to achieve a comfortable retirement income.

Personal pension

A personal pension is a tax-efficient savings plan designed to help you build a retirement fund. These types of pensions include:

• defined contribution pensions
• self-invested personal pensions (SIPP)
• workplace pension schemes

If you’ve contributed to a personal pension, you can access it from age 55 (rising to 57 in 2028). Your contributions benefit from tax relief, allowing you to claim back a portion of the tax you paid.

Now that we've covered the basics of pension pots, let's consider what a good monthly retirement income looks like and how to calculate it.

What is a good monthly retirement income?

A ‘good’ monthly retirement income depends on the life you want to live. A useful rule of thumb is to build an income that’s around 50-70% of your pre-retirement salary to sustain your current lifestyle. A lower retirement income is often sufficient because, without work-related expenses and the need to save for the future, retirees have lower overall living costs.

How to calculate your retirement costs

Take a close look at your anticipated retirement expenses – things like housing, utilities, groceries, and health care. Don't forget to factor in the extras like holidays or hobbies that will make your retirement enjoyable.

Once you know these costs, use our online retirement calculator to estimate how much your pension fund could be worth if nothing changes. From there, you can adjust your savings strategy to ensure you have enough for a comfortable retirement income.

Calculate retirement fund

How to access your pension to maximise your retirement income

The way you access your pension plays a key role in how much income you’ll have during retirement. The right option for you depends on your personal needs and goals. Below, we’ve outlined the main options available, each offering its own advantages to help you build the retirement lifestyle you’ve worked hard for.

Buy an annuity

An annuity is a financial product that guarantees a lifetime income in return for a lump sum payment. You can easily convert your pension pot into an annuity to get a monthly income for the rest of your life. Annuities are taxable, but you can take 25% tax-free as a one-off lump sum. The amount of the annuity you receive depends on factors like your age, health, and the size of your pension fund.

Pension drawdown

Pension drawdown is a flexible way of receiving an income from your pension while leaving it invested. You can withdraw money as needed, making it ideal for those with larger pension pots who wish to continue growing their savings while enjoying an income. But because your pension is still invested, its value can go up and down depending on how your investments perform. This could affect how much you choose to withdraw over time.

Combine annuity and drawdown

A combination of annuity and drawdown provides both security and flexibility. You can use part of your pension pot to buy an annuity for a guaranteed income, while the rest stays invested in a drawdown. This lets you enjoy the benefits of both options.

Lump sums

You also have the option to take your entire pension pot in one go or as smaller sums of cash. The first 25% of your lump sum will be tax-free and any remaining amount will be taxable. But taking a lump sum instead of a steady income could have risks and it may impact your long-term financial stability.

Planning for a comfortable retirement in three steps

1. Understand your income needs

Think beyond the basics and consider your ideal lifestyle when planning your retirement income. How much money will you need to support your long-term goals? A good monthly retirement income should not only cover your essential costs but also help you enjoy the lifestyle you want. The clearer your vision, the easier it will be to shape a retirement plan that works for you.

2. Maximise tax efficiency in your pension withdrawals

Pension withdrawals (beyond the 25% tax-free lump sum) will be taxed. Understanding how to structure your pension withdrawals to minimise tax impact could make a significant difference to how much money you have to fund your retirement.

3. Earn higher returns on your savings

Don’t leave money on the table. If your savings are sitting idle in low-interest accounts, you could be missing out on better returns. That’s where Flagstone comes in.

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