Help! I’ve ignored my pension – Part 3 – Working out how much you need

Depending on how old you are, retirement might seem like a very distant prospect. How on earth can you predict what you’ll want to do or what that’ll cost? This is why many people delay starting a pension. Will you be sitting in front of Countdown with a cup of tea or scampering around the world having adventures? Spending some time thinking through your likely expenditure makes it much easier to plan for the future.

In this post, I’ll talk you through some exercises to help you decide what you’ll need. Please note, the content below requires you to contemplate old age, infirmity, and death, so perhaps save it for a sunny day.

Working Out Your Expenditure

Popular advice holds that you need two-thirds of your current income when you retire. This might give you a target to aim for, but it’s based on a number of potentially unhelpful assumptions, for example, that you’ll have paid off your mortgage.

  • If you rent your home, your housing costs (which are usually the largest expense) won’t change.
  • If you walk to work or are based at home, you won’t save the cost of a season ticket or parking charges.
  • If you have children, your expenditure drops when they leave home, but perhaps you’ll be spending on grandchildren or helping out with loans.

So, depending on your situation, your income might need to remain fairly static after retirement. Here are three steps to achieve a more accurate prediction:

  1. If you haven’t done so already, download the MoneySavingExpert budget planner and enter your current outgoings
  2. Make a copy of the budget, then tweak it for early retirement. This is hopefully the period where you’re still active and taking advantage of your freedom. You might be reducing some costs, e.g. mortgage, pension contributions, season ticket or petrol, but increasing others, such as holidays.
  3. Now make another copy and think about late retirement – when you slow down and spend more time at home. This stage can be depressing, as it forces you to consider the less active part of your life. It’s possible you’ll be going on fewer holidays, but spending more on services, such as gardeners and taxis. Your heating costs could rise significantly, too.

Of course, you can’t predict the future. However, even a rough calculation makes planning easier.

Comparing Income with Expenditure

Now you know how much you need, it’s time to compare this with your projected income (head over to Part 1 of this series for tips on how to discover your pension entitlements). If you have a final salary (or Defined Benefit) pension scheme, this is easy. Your statement should show your guaranteed annual income, based on the specified retirement age. Retire earlier and you’ll receive a lower amount. Don’t forget that your pension is also subject to income tax. If you receive £20,000 pa, you’ll pay £1,628 in tax.1 Assuming you’ve reached the state pension age, you no longer need to pay National Insurance.

Those of you who have a Defined Contribution (or Money Purchase) pension or other retirement savings need to do some sums. Essentially, you’re trying to work out how to make a pot of money last throughout your retirement. This is straightforward if you know three things:

  • How long you’ll live
  • How the stock market will perform
  • What will happen to inflation

That’s right, it’s an almost impossible task. Take too much too soon and you could spend your final years in penury; take too little and you’ll deny yourself some fun and potentially leave the taxman with a large windfall. To get an idea of how long you’ll live, try this life expectancy calculator from the Office for National Statistics.

My life expectancy is 86, but there’s a 1 in 4 chance that I’ll make it to 94, and a 1 in 10 ‘risk’ of becoming a centenarian. As I don’t have a final salary pension, I’ve planned a fund that’ll stretch more than 30 years.

The Which? Income Draw Down Calculator helps you work out how much money you might need, and it’ll also factor in inflation and stock market performance. For example, if you had a pension pot of £300K invested in a mix of funds and bonds, then withdrew £30K pa, you’d run out of money in year 12 of your retirement.

Screenshot of income drawdown calculator

Errk. Reducing your income to £24K gives you another 4 years of funded retirement. Experiment with your own figures to discover the implications of different scenarios. You might find that the retirement income you hoped for is difficult to achieve.

One way of avoiding these risks is to buy an annuity from an insurance company, some of which give you a guaranteed inflation-linked income for life. The downside is that you pay a high price for that security. The cost depends on factors including your age, health, and even your postcode. Purchasing an annuity is a major decision, as you can’t change your mind afterwards. For more information, visit the Money Advice Service guide. You’ll also find a questionnaire that’ll estimate how much you could receive from an annuity.

In this example, choosing an inflation-linked annuity for a pension pot of £300K generates a secure, guaranteed annual income of almost £10,000.2 But managing it yourself could result in £16,000, assuming you don’t live too long. You’re possibly paying £6K pa for that security. The exact figures depend on your personal circumstances and when you retire. The questionnaire – which includes helpful videos to explain every step – does give you an idea of the compromises, though.

What if there’s a shortfall?

Perhaps you’ve played with the calculators and the numbers aren’t stacking up. If you’re close to retirement, it’s a good idea to get advice from a Certified Financial Planner. Although expensive, they can perform far more sophisticated calculations and also advise you on how to invest your money. Otherwise, there are several options to consider:

  • Decrease your projected retirement income. Are there any areas of expenditure you could reconsider? This might include downsizing and/or moving to an area where you no longer need a car.
  • Retire later. This gives your pension pot longer to grow and reduces the number of years you’re drawing on it. If you don’t enjoy your current job, ponder what else you might do. Take a look at my post on Finding Your Ikigai for some tips on identifying a career that’s right for you.
  • Build your assets. In my previous post, I explained some options on saving for retirement. You could possibly boost your income by starting a side hustle or renting a room. Also, review your outgoings with a critical eye. Small savings across multiple expenses could add up to a significant sum.

In future posts, I’ll explain more about savings and investments, and also demonstrate the impact of inflation on long-term financial planning.


Confronting old age is sometimes a frightening experience, especially if you discover a gap in your finances. But it’s best to deal with the problem as soon as possible. There are always options, but you need to face the facts first. Taking action now could mean a long and happy retirement.

As a financial coach, I can guide you through the process of your pension healthcheck. By explaining the options available and using forecasting tools, I support you in making an informed decision that’s suitable for your situation.  I never recommend a specific product or course of action. If you require advice rather than coaching, you need to see a qualified financial advisor. They’ll either recommend products on which they receive commission, or you’ll pay a fee for independent advice. Please contact me if you’d like a free 15-minute chat about pensions or any other aspect of financial wellbeing.

  1. Based on the 2018/19 rates. []
  2. Based on a 65-year-old non-smoking woman starting an annuity in November 2019. []
Catherine Pope

I'm a financial coach who loves Victorian novels, technology, and big books about pensions.

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