Money Advice Service

Retirement is no longer the cliff-edge it once was. In the past people tended to work until a retirement age set by their employer or the State. But you can now usually work for as long as you want and you don’t have to retire all in one go. If you are considering taking your pension early you should understand how doing so will reduce your retirement income and make sure you have what you need for the whole of your retirement.

You might choose to retire gradually or to carry on working for longer perhaps moving to part-time work before you stop completely.

When you give up work you’re likely to lose your main source of income.

So you need to make sure you’ll have enough income from other sources before you retire.

It’s hard to know off the top of your head much income you’ll need.

But there are several things you can do and think about which can help you decide when you can afford to retire.

How long will my retirement be?

Retirement can last for 30 years or more depending on when you retire and how long you live.

Most people underestimate how long they’re likely to live.

A 65 year old man now has a 50% chance of living to 87 and a 65 year old woman a 50% chance of living to 90 (Source: ONS data, 2014).

The longer your retirement, the longer your retirement income needs to last.

If you have a secure income for the whole of your retirement this is not a problem.

If you don’t, then you need to make sure your money doesn’t run out before you do.

How much income will I need?

Your spending and the amount of income you need will change when you retire.

You won’t have any work expenses but you might spend more time on hobbies or at home which could mean your household bills increase.

Cashing in your pension to:

  • Clear debts
  • Buy a holiday, or
  • Indulge in a big-ticket item

Will reduce the money you’ll have to live on in retirement, and you could end up with a large tax bill.

If you need to clear debts get specialist help – see Where to get free debt advice.

Draw up a retirement budget

Make a list of all the essentials you’ll need to pay for in retirement such as accommodation, food and bills.

You need to make sure you’ll have enough secure income (that’s income you can rely on) throughout your retirement to at least cover these costs.

Bear in mind that your spending habits are likely to change during your retirement.

As you get older you might spend less on going out and more time at home and on healthcare.

Later in retirement you might need extra help around your home or to pay for care fees.

Inflation is also likely to affect how much money you need.

Prices tend to rise over time which means your income also needs to increase if you’re to maintain your standard of living.

Read our guide on Retirement budget planning

What income will I have?

Most people have more than one source of income in retirement.

Your main income is likely to come from your State Pension and any other pensions you’ve paid into.

You might also have other sources of income such as from savings or property.

You need to make sure you have enough secure income before you fully give up work otherwise you risk running out of money before you die.

Secure income includes:

  • Your State Pension,
  • A promised income from a past employer’s pension scheme, and
  • Any other income you’re guaranteed to receive for the rest of your life.

It’s worth remembering that most of your retirement income (including your State Pension) is taxable so this will affect how much money you actually receive.

The State Pension

You can take your State Pension once you reach your State Pension age.

You can defer taking your State Pension. It will increase by 1% for every 9 weeks you defer which works out to just under 5.8% for every full year.

Your State Pension usually increases by at least the rate of inflation each year.

Read our guide on the State Pension for more details.

You might be entitled to a pension from a past employer’s defined benefit pension scheme (also known as a final salary or career average scheme).

The normal retirement age for these is typically 65 but you might be able to take your retirement income earlier or defer it until later.

If you take your retirement income early you’re likely to get a significantly reduced amount.

If you defer you’re likely to get more.

Ask your pension scheme provider for more details.

Workplace or personal pension where you build up your own pension pot

Under new flexible rules introduced from April 2015, you can start taking cash from your pot from age 55.

However if you take money out of your pot before you retire, you’ll have less available to provide yourself with an income in retirement.

If you want to provide yourself with a secure income in retirement you can use some or all of your pot to buy a lifetime annuity which provides a guaranteed income for life.

Other income

You might have other sources of income in retirement.

This income is likely to vary over time and might not be guaranteed for life.

This income could come from:

  • Part-time work
  • Pension pot you have invested and can draw a flexible income or lump sums from (the value of your pot is likely to go up and down and this could affect the amount of income you receive and how long your pot lasts)
  • Savings and investments (the amount of interest or income you earn is likely to vary depending on interest rates and the performance of your investments)
  • Property. This could be rental income from any property you own (this income is not guaranteed as you might have periods when you’re not able to rent out the property). Or you might plan to sell the property and raise money to supplement your income
  • Your home. You might rent out a room to a lodger, plan to downsize and use any money raised to supplement your income, or sell some of the equity in your home in return for a lump sum or income

Once you’ve worked out how much money you’ll need and the sources of income you’ll have in retirement, you’ll have a clearer idea of when you can afford to retire.

This article is provided by the Money Advice Service.