Average UK pension pot

According to one of the top pension providers in the UK, Aegon, the average value of a pension pot in the UK is currently around £50,000 with men having an average savings value of £73,600 and women with a savings value of £24,900. These figures relate to the cash value of defined contribution savings rather than Final Salary Pension Scheme funds which are pension investment assets with associated long-term liabilities (not separate pots of money with each member’s name on it).

The reason the average pension pot value for women is considerably lower than for men is because many women left paid work to have children and historically, they were generally paid less than men and therefore, were less able to contribute. Lower-income also means lower employer pension contributions.

Average pension pot values also vary considerably by county with Surrey averaging £88,000 and Avon, the lowest, averaging £35,000. Many self-employed people are not saving anywhere near enough for a comfortable retirement and, without the right level of National Insurance credits, will not be receiving the full state pension when they reach their state pension age.

Something is better than nothing and starting retirement savings as early as possible has fantastic monetary benefits when the effect of compounding positive returns comes into play over several decades of saving. It is worth noting that advice on pensions must only be given by those who are appropriately authorised and regulated to give pensions and investment advice.

Getting good financial advice from an adviser regulated by the Financial Conduct Authority is a proven way of improving the chances of ending up with a decent level of personal pension with the right level of annual income needed. Add to this a full state pension and the result should be a comfortable retirement at the desired retirement age.

Until Auto Enrolment became mandatory, many employers and employees were not contributing to their employees’ workplace pension. In fact, it is only relatively recently (in April 2019) that the minimum total contribution of the employer/employee rose to a minimum of 8% of salary.

The calculation is more complex than that as there are lower and upper limits in place and, employees can opt-out.

This is not 8% of the full gross salary. If the salary exceeds the upper limit set by Auto Enrolment rules (subject to being changed by future legislation so not stated here) then the minimum amount will be lower. That being said, being auto-enrolled in an employer’s scheme should be a no-brainer unless your pension pot is so large it causes you a problem with your protected Lifetime allowance (if you are lucky enough to have this).

Pension savings attract valuable tax benefits representing a big boost to this method of saving versus using an ISA or putting your cash in the bank. In effect, your contributions are allocated from your gross income in full and any growth is tax-free. There are annual limits (£40,000) and lifetime limits (£1,073,100) but this does not usually affect the average person as you can see by the average UK pension pot size stated in this article.

As ever, getting good financial advice is key to implementing the right (suitable) investments for you whether these are for accumulating or decumulating your retirement savings. Putting together a bespoke plan is what Financial Planners excel at and the cost of creating your personal lifetime financial plan should be just a small fraction of the total monetary and wellbeing benefits you will harvest year after year.

Your financial plans should be reviewed on a regular basis to take account of changes that happen in your life as well as changes that occur in the economy and to take account of any changes in legislation or new regulations that might affect your long-term financial wellbeing. Doing nothing and leaving this to chance is unlikely to result in the best possible outcome and is therefore, more likely to result in a lower quality of life in retirement than desired.

Lifetime allowance 2021/22

The pensions Lifetime Allowance (LTA) caps the upper level at which tax-free cash can be withdrawn from your pension savings at the rate of 25% and the LTA is also used at age 75 to make a tax charge for the excess amount over the LTA if you have an excess. This is an area where forward planning with a financial adviser or financial planner can help with managing the amount of tax that might need to be paid due to a lifetime allowance charge when this important birthday arrives.

The LTA applies to all your pensions savings in aggregate even if they are in many different pension policies or schemes. Special rules apply to Final Salary Pension Schemes such that the value for LTA purposes is 20 times the annual pension entitlement. As an example, if you expect to get a pension of £50,000 per year your value for LTA purposes is £1,000,000 which is currently below the LTA, but you will need to add in all other defined contribution pension pots to arrive at the total value of your pension retirement savings.

The standard Lifetime Allowance for the current tax year (2021-2022) is £1,073,100 and it applies to the total amount (value) of your pension benefits across all your pension pots. It did not increase as expected in this year’s budget as it was expected to do from last year’s level in line with the consumer price index, but now it is set to remain at this year’s level for the next few years, but we will see whether this position changes.

The LTA is reviewed in the budget and therefore, it is better not to speculate at what level it might be in the future.

It wasn’t that long ago that the LTA level was £1.8m. Then it started coming down, then back up again, now ‘frozen’. The subject of pensions tax relief is always the subject of much discussion amongst the pensions industry because HM Revenue ‘give away’ tens of £ billion each year in tax relief and they need to try to balance everybody’s needs. There is a perennial expectation that the higher rate of tax relief will be taken away from pension tax relief, but it hasn’t happened yet.

It is still possible to have a higher protected LTA than the standard one, but the bar is quite high as your pension savings would need to have been valued at £1,250,000 before the end of 2015-2016 tax-year and you must have ceased all private pension contributions by April 2016. If you think this is a possibility for you, speak to a financial adviser so they can check this for you as it is potentially worth an extra £44,225 in tax-free cash allowance.

The state pension does not count towards the LTA and continues to be paid out regardless of a person’s wealth. The entitlement to state pensions is based purely on National Insurance (NI) credits gained during your working years. Credits start to be earned at age 16 and end at your state pension age. NI Credits are given to those receiving Child Benefit so there is no need for them to pay voluntary NI contributions during their child-rearing years.

Worrying about the LTA is probably a good problem to have and dealing with it tax-efficiently can be quite a complex challenge especially, when considering estate planning and wealth transfer. As ever, a good financial planner will be able to discuss your options with you so you can be well informed how to handle this.

How much do i need to retire on uk

We need liquid assets to buy food and pay our bills. An example of an illiquid asset is a house or flat. We cannot take a brick from our property and use it to pay for food at the supermarket! Retirement savings need to be liquid enough to make funding your bank account quick and straightforward when you need it.

Most of us fund a bank account on a regular basis to meet recurring expenditures. So, when you retire from paid work your salary stops. Then where does that regular money come from that you need to pay the bills and have a good life?

If you stop earning an income before your state pension entitlement which is currently age 66, then your regular expenditure needs to be met from your savings unless you are going to be financially dependant on someone else. If you have less than 10 years National Insurance credits, you will not be entitled to the state pension.

It is important to be able to work out how much your retirement lifestyle will cost you so you can assess how much annual income you will need to retire comfortably.

If you want to retire at 60 years old and you think you will probably live until you are 90, that’s 30 years’ worth of retirement lifestyle to fund from your net worth (assets minus liabilities).

The generally observed spending pattern in retirement is for it to be front-loaded meaning retirees spend more money in the early years of retirement and then less as their mobility becomes an issue. If the average annual expenditure you require is £20,000 in today’s money, then the total sum required would be £600,000 over 30 years.

This does not mean that £600,000 is required from day one because if you are entitled to the full state pension then this regular income of approximately £9,300 per year reduces the average annual requirement down to £11,700 when your state pension starts. Therefore, many people choose their state pension age as their eventual retirement date.

Others choose to carry on working for as long as they can because they need the involvement that their working life gives them as well as the paid income. Tax-advantaged pension contributions are available up to age 75 and National Insurance contributions are not deducted when you reach state pension age.

See also How to build a Lifetime Financial Plan.

How much money do you need to retire on

The state pension is set at a level that should cover your essential living expenses but not much else. If you plan to have a meagre retirement lifestyle with no frills, then aiming for the state pension annual amount is probably a suitable guide.

However, this question is better answered by focusing on your personal circumstances in detail: How much do I need to retire?

How much pension do you need to retire on in the UK?

The minimum amount you need to retire in the UK could be thought of as the amount of the full state pension which is currently £179.60 per week at age 66. This figure is considered enough to meet essential living expenses but does not cover living accommodation costs such as rent or mortgage payments. In the UK, the social security system is a safety net for those who find themselves with little or no resources to fund their retirement lifestyle.

However, the amount you need to retire comfortably will naturally depend upon the retirement lifestyle you plan for and whether you are a single person household or a couple sharing the bills. So, it is very important to think about this carefully and well in advance of the day you intend to stop working for a living.

A financial planner will analyse your current financial position to check you have the resources to meet your retirement goals and develop a plan to help you get to where you want to be. Working out your annual income requirement for 10-, 20- or 30-years’ time is part art form part science.

This is a long-term plan therefore it needs to be reviewed regularly to help you stay on track to achieve your goals.

A pension calculator is a tool used to take a snapshot of where you are now with your pension pot or where you need to be in x number of years’ time. It can help you work out what your pension contributions need to be and what pension income you might receive in x years’ time. Certain assumptions are used about investment growth, inflation, longevity, and such like which are bound to change over time. Another good reason why plans need regular reviews and appropriate adjustments made to those assumptions.

Many people accelerate their pension savings rate as they approach the last 10 years of working life because they realise, they may not have enough savings for a comfortable retirement lifestyle. To work out how much pension you need is better answered by How much money do you need to retire? Will you retire at state pension age or sooner? Perhaps much later in life or never!

An HMRC recognised UK pension scheme is the most tax-advantaged way of contributing relevant earnings to your pension savings which should therefore be an essential part of your retirement saving planning. It makes good financial sense to contribute as much as you can afford from your salaried taxable income to your pension savings and benefit from the tax relief. If you are self-employed like millions are in the UK, then you can still make tax-efficient pension savings from your earnings by using personal pensions.

If you need help working out the right amount of affordable contributions for your circumstances, it is best to consult a financial planner, or a financial adviser authorised and regulated by the financial conduct authority for help and advice. Start saving as early as you can in a workplace pension to reap the benefits of compounding positive investment returns over many years.

The current pension Annual Allowance is £40,000. To contribute a higher amount than this you will need to meet certain conditions defined by the carry-forward rules. Even non-earners such as homemakers can contribute up to £3,600 gross per year (£2,880 net of basic rate tax). It is possible to gift this amount to a child or grandchild for their private pension every year and benefit from the annual gifting exemption for inheritance tax purposes. It’s a win-win situation for those able to take advantage of long-term financial planning.

The pensions Lifetime Allowance (LTA) caps the upper level at which tax-free cash can be withdrawn from your pension savings which includes the total taken across occupational and private pensions. The LTA is also used at age 75 to make a tax charge for the excess amount over the LTA if you have one. Age 55 is currently the earliest age at which tax-free cash can be taken and this age limit will rise to 57 in 2028.

Final salary pension early retirement calculator

Working out your annual income for life can be straight forward but it can also be very complex and therefore is best resolved by Retirement Planning. How much money do you need for the rest of your life? It is a very personal matter.

It is better to have a degree of certainty coming from guaranteed income such as the annual benefit from a DB pension (Final Salary Scheme) as well as the state pension. Perhaps even rental income and or a lifetime annuity.

The degree of certainty will be a personal choice and be dependant on the lifestyle you require or aspire to in retirement and the total wealth you have at your disposal at retirement. If you have a risk-averse nature and feel uncomfortable relying on investments, then you would be better looking for as much certainty as you can find.

Phased retirement often takes place between the age of 55 and 67 when people are of pensionable age but still working in some capacity. Currently, to retire at 55 means any tax-free cash will be available to be taken as a lump sum benefit. This minimum age will be increasing to 57 in line with the increase in state pension age of 67 between 2026 and 2028.

This is because people are living longer and therefore the state pension burden on the taxpayer has substantially increased over recent times to approximately £100 billion per year today. But bear in mind that legislation may be altered by the government de jour before the next scheduled change.

For private schemes, it is normally a case of requesting an Early Retirement Quote (ERQ) from your scheme.

Your scheme will work out your reduced pension annual benefit and reduced Lump Sum based on the number of years away from the Normal Retirement Age (NRA) of your scheme.

Some publicly funded Final Salary Pension Schemes such as the Teacher’s Pension Scheme (TPS) provide online websites for their members to get a good idea of what their benefits would be if they retired before normal retirement age from as early as 55 years old. Teachers who have been in the TPS for some time will have an earlier pensionable age than those who joined later.

Publicly funded schemes are in the process of moving over to defined contribution schemes from career-averaged defined benefit pension schemes.

Rather than using an online pension calculator and potentially making a mistake with the figures, it is better to get a written quote you can rely on to make such an important decision as retiring early. The Early Retirement Quote (ERQ) when requested as part of a potential transfer out analysis case is used when assessing the value of the Cash Equivalent Transfer Value offered by your scheme.

Transferring out of a privately funded Final Salary Pension Scheme must be done before commencement of the pension benefits and is often done before the scheme’s Normal Retirement Age (NRA) although some schemes do allow postponement and transfer later than NRA allowing for the transfer value to potentially increase.

Transferring a DB pension CETV to a defined contribution pension pot means giving up a guaranteed income for life in favour of being able to flexibility access your pension fund but as the Financial Conduct Authority point out: This is unlikely to be suitable for most people because giving up guaranteed income will backfire on you if you run out of money.

Personal pensions can be accessed for your annual income requirement by requesting the amount you need from the scheme as a drawdown instruction. The amount can be varied and even stopped altogether if so desired. In fact, since the pensions freedom act 2015, you can withdraw the whole amount subject to income tax. As you can see, defined contribution personal pensions give you enough rope…

Contrast this with the annual income from defined benefit schemes (Final Salary) which is fixed.

It cannot be varied or stopped, and the income is for life as well as being indexed to keep up with inflation.

The subject of pension income is part of a broader financial planning area called Retirement Planning. Financial Planners will look at strategies for building up a retirement nest egg that meets your needs in retirement. This can include more than just pensions but it always looks at the most tax-efficient way to accumulate wealth and spend it too!

Final salary pension calculator

You can find basic online calculators to work out how much your annual pension entitlement would be at retirement based on knowing your final salary before tax (gross salary) is paid into the scheme. You also need to know how many years’ service you did plus the scheme accrual rate which is commonly expressed as a fraction such as 1/60 or 1/80.

Some organisations have several schemes (e.g., Scheme A, Scheme B etc) and they may have different accrual rates and different Normal Retirement Ages (e.g., age 55, age 60, age 65, age 67). Hence an employer could have one scheme with higher benefits than another scheme they run.

It may be that your employer switched you out of their Final Salary Scheme (aka defined benefit pension scheme) because they could not afford to keep it going along the same lines and, as an alternative, they had to start a defined contribution pension scheme for their employees. In this case, your final salary used for the calculation of benefits is likely the final one used to contribute to the Final Salary Scheme however, there may still be some salary-link increasing entitlement as your salary increased.

If you are still working for the same employer, they will be the first port of call to tell you exactly how much your Final Salary Pension will be and your pension age.

If you are at least 55 years of age you may want to ask them for an Early Retirement Quote (ERQ) if you are considering retiring early. If you are in ill-health before retirement age, it might be worth talking with your scheme to see how they can help you take benefits early.

As an example, if your final salary counted for the scheme was £30,000 and you have 10 years of service contributing to that scheme with a scheme accrual rate of 1/60 then you can expect an annual income (pension) of £5,000 (guaranteed income). Using the same salary and accrual but 20 years of service, the annual pension would be £10,000 income for life.

The Cash Equivalent Transfer Value (CETV) is not a simple calculation based on the annual pension entitlement but instead, it is a Final Salary Pension Scheme specific offer. It is a transferrable cash offer that has a guaranteed value for a limited time. This is the offer that your scheme makes if you agree to give up your guaranteed Defined Benefits.

The amount of lump sum payable is specific to the Final Salary Pension Scheme so you would need to know the specific formula they use to calculate this. This information is often made available in the member’s Final Salary Pension Scheme handbook.

Transferring a DB pension CETV to a defined contribution pension pot means giving up a guaranteed income for life in favour of being able to flexibility access your pension fund but as the Financial Conduct Authority point out: This is unlikely to be suitable for most people. The main reason for this stance is that giving up guaranteed income might backfire on you if you run out of money.

Even if you have other personal pensions and investments, they do not produce guaranteed income.

The state pension is one form of guaranteed income that provides a good buffer for most people to meet essential expenditure if paid out at the full amount (currently requires 35 years of full National Insurance credits) However, we are sure most people would like more than the amount the full state pension pays out to have an enjoyable retirement. As such, cashing in Final Salary Benefits without fully appreciating all in entails could be a serious error.

The subject of pension income is part of a broader financial planning area called Retirement Planning. Financial Planners will look at strategies for building up a retirement nest egg that meets your needs in retirement. This can include more than just pensions but it always looks at the most tax-efficient way to accumulate funds and spend them too!

Final salary pension early retirement

Can I take my benefits early?

Taking your benefits earlier than the Normal Retirement Age (NRA) of the scheme is possible and is not normally an issue if you are at least the age of 55 years. If you decide to take benefits early, your Final Salary Pension Scheme will calculate a reduced tax-free lump sum entitlement and a reduced annual pension income. You would not receive your full scheme pension as defined by your entitlement at the scheme’s NRA i.e., your normal retirement date.

The reduced pension will still escalate in line with a measure of inflation, it just starts from a lower amount than if you had retired at the Normal Retirement Age. This is because the scheme will start paying you a regular retirement income earlier than they had planned for, so a reduced amount is calculated.

This might be a good option if you require guaranteed regular income for life because you actually are retiring before your normal retirement date and you need the pension income to live on. Conversely, it would make little sense to take your pension early if you are earning enough money to meet your lifestyle expenses (whether working part-time or full-time) unless you wanted to use any surplus funds for a special purpose.

Calculating how much your Final Salary Pension benefits would be is best done by your scheme by way of requesting an Early Retirement Quote (ERQ). If a Final Salary Pension Transfer is possible and you have assigned an adviser to check whether a transfer out would be suitable for you, your adviser will request an ERQ on your behalf as part of the analysis process if you are below the NRD.

Note that some schemes allow members to carry on accruing benefits after their normal retirement age.

Taking your benefits early due to ill-health will require submitting medical evidence to the scheme administrators so the scheme trustees can decide what action to take regarding the level of benefits to release early. If there is a shortened life expectancy due to serious ill-health, then the trustees may have the discretion to make higher pensions payments and/or lump sum tax free cash payments. This will be on a case-by-case basis.

If the ill-health is terminal, transferring your fund to a defined contribution pension may mean the transferred amount is counted in the value of your estate for inheritance tax (IHT) purposes if you die within 2 years of making the transfer. Your adviser will explain the pros and cons of making a transfer under these circumstances and will advise on the most suitable course of action to protect your wealth for you and your heirs.

Once you are in receipt of your scheme pension, the amount you receive is then 100% protected by the pension protection fund (PPF). If the scheme gets into trouble, your retirement income is insured by the scheme’s contributions to the PPF which takes appropriate action to ensure all scheme pensioners are fully covered in the event of a scheme failing.

Unlike a defined contribution pension, you do not have a pension pot as such within a Final Salary Scheme.

There is no logical pot of money with your name on it. It could be described as a complex mix of investments with current and future liabilities to all its members.

The scheme has an obligation to pay you a regular secure income and once in payment, there is no possibility of transferring out a cash equivalent amount. Transfers can only be done before the pension starts to pay out. This works the same way as annuities do. You part with a lump sum of money to buy a guaranteed future income but you cannot reverse this by asking for the lump sum back.

This is the main reason why defined contribution pensions have better death benefits than Final Salary Pensions. Once the member, spouse and any dependent children pass, the Final Salary Scheme has no further liability to pay out to your family. If you do not have a spouse or any children, the position is even worse because you cannot pass anything onto other loved ones or bequest to charitable donations as many people do within their defined contribution pension pot.

Final salary pension transfer

What is the risk of me running out of money?

This question requires serious consideration and the understanding that transferring out of a guaranteed arrangement means taking on the risk of running out of money. Transferring to a flexible arrangement where you could conceivably withdraw all your retirement funds in one go would be liberating but would it make financial sense for you? Do you need the flexibility of access to varying amounts of cash during your retirement phase or would a regular fixed income suit your lifestyle better?

Ending up penniless when you had enough secure income to live on for life is a dim prospect. We are fortunate enough to have social services to provide for those who can’t provide for themselves, but the point of retirement savings is to be able to afford a decent lifestyle in retirement.

The full state pension is a good baseline income for a lot of people, especially if there is no mortgage or rent to pay.

The essential household expenses should be covered by secure income such as the state pension, an annuity, rental income or guaranteed private pension income.

Transferring a Final Salary Pension to a money purchase pension and then spending the funds too quickly would be a big mistake if there are no other resources to fall back on. A recommendation to transfer is based on all your financial assets not just on the Final Salary Pension CETV. If you are married, then it is based on all the financial assets of both married partners (or civil partners) including state pension forecasts for both partners.

It is fair to assume that people who have managed their personal finances diligently for decades are unlikely to suddenly blow all their hard-earned retirement savings in short order.

Having a good understanding of the cost of your lifestyle now and the expected cost in retirement is required so that sufficient resources can be safely assumed to last for the rest of your life and avoid the risk of ruin.

Ultimately, there is nothing to stop you from spending all your retirement savings early if you transfer out of your Final Salary Pension Scheme. Remaining in the scheme prevents the chance of this happening as the pension income would be a fixed amount paid monthly for the rest of your life.

Advisers that help you make a suitable decision to transfer out of your Final Salary Pension will want to continue to provide you with ongoing advice and help with managing your investment funds and personal finances. The ongoing advice fee is an optional service that you can turn off if you feel it does not provide enough value for you but having a professional financial planner on hand certainly helps most people feel more confident about their finances.

Final salary pension lump sum

Can I get more Tax-free cash by transferring my Final Salary Pension?

How much is your Final Salary Pension Tax-free Lump Sum?

In general, transferring out of a Final Salary Pension scheme does enable more Tax-free cash to be available than remaining in the scheme however, there are some significant exceptions where a scheme might offer enhanced Tax-free cash lump sums. This is yet another reason why it is so important to have the value of your safeguarded benefits fully analysed.

When you request a Cash Equivalent Transfer from your Final Salary Pension scheme either directly or via your adviser, you should receive a multipage document that explains your options. The default option is to remain in the scheme and if that is your chosen option, the document explains how much Tax-free Lump Sum you are entitled to at retirement as well as the annual pension amount due.

The Tax-free Lump Sum amount is also an option so, if you wanted a higher annual pension amount, you could forego the Tax-free Lump Sum.

The figures stated relate to the scheme’s Normal Retirement Age (NRA) so, if you still have a few years to go until NRA, these figures are the projected amount when you reach that age.

As part of the analysis process, if you are younger than the Normal Retirement Age but at least 55, your adviser may also request an Early Retirement Quote on your behalf. This is a separate calculation the scheme undertakes to work out how much Tax-free Lump Sum and annual pension amount you would get if you retired now. The minimum retirement age, in this case, is currently 55 because that is the minimum age all pension funds can be accessed, and benefits are taken.

Another significant difference between a Final Salary Pension Lump Sum and the Tax-free cash available in a defined contribution pension is that if it is going to be taken from the Final Salary Pension scheme, then it must be taken all in one go at the commencement of the pension. In this case, there is no flexible access where you could take it gradually over several years like you can in a modern flexible pension arrangement.

After a transfer, the entire fund could be left to grow without taking Tax-free cash allowing for the possibility of a larger amount of Tax-free cash to be taken below the Lifetime Allowance (LTA) limit in force at the time. However, be aware that investment returns are not guaranteed so it is possible that the transferred fund could decrease in value resulting in a lower amount of Tax-free cash available.

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