![]() ‘I don’t want to be working until the state pension age’ You may also have accrued several defined benefit pots with different employers which could each pay you an income. However, you may be penalised for retiring before aged 60 or 65. What age you retire depends on how long you have been with your employer and the salary you want to receive. Many defined benefit schemes have an accrual rate of 1/80, according to the Pension Protection Fund, which means you receive a pension equivalent of 1/80th of your salary multiplied by your number of years’ service. Taking the example of a final salary scheme, you may receive a retirement income of £30,000 a year if your annual income in your last working year is £70,000 and you have been in your employer’s pension scheme for 35 years – perhaps since the age of 20 if you wanted to retire aged 55. With a defined benefit scheme, the amount you are paid in retirement depends on your length of service and your final salary or career average at the age of retirement. Almost 10 million people will rely on defined benefit schemes for their retirement income, according to government data. Some people will have a final salary or defined benefit pension, which pays a guaranteed income for life. Another option is for homeowners to sell up and downsize to release cash. Property investment is another common way to fund retirement or top up pension income, with rent paid by tenants providing an income to a landlord. The age at which private pensions can be accessed will rise to 57 in 2028, so ISAs and other savings will be even more important to those hoping to retire in their mid-50s. People who want to retire before 55 – the minimum age private pensions can be accessed – will typically rely on savings held in ISAs or other investment or savings accounts to pay them an income until they can get the state pension (currently £10,600 a year per individual) and other pension income. This is for an escalating annuity that rises each year to limit the impact of inflation. But as a rough indication, you’ll need a pot worth at least £800,000 to get a single person annuity income of £30,000 a year at age 55, according to data from Sharing Pensions. If buying an annuity, the amount you’ll get as an annual income will depend on your age, health and lifestyle choices, such as smoking. Assuming inflation is 2 per cent a year, an income of £30,000 today would be around £60,000 in 35 years’ time. Tom Selby, an analyst at investment platform AJ Bell, estimates that someone wanting an income above £30,000 from mid-50s would need a pot worth around £725,000, which would last 40 years.īut he adds there is also inflation to consider too. Source: PensionBee, assumes inflation at 2.5% and growth at 4% during retirement, and the individual will get the full state pension from 67 The table below indicates how much you may need to set aside each month to pay yourself an income of £30,000 from age 55. With drawdown, the typical recommendation is not to withdraw more than 4 per cent a year of your total pot, adjusted for inflation, to reduce the risk of running out of money if you live longer than expected. Or you can choose to buy an annuity with the money, an insurance product that pays a set income for life like a defined benefit pension. You can either opt for drawdown, where you gradually withdraw money from the pot over time. When you choose to retire, the total amount you’ll receive in income will depend on the total value of your pensions. While they don’t benefit from employer contributions, they do benefit from tax relief. Self-employed people also pay into defined contribution pensions. You get tax relief on money paid into a pension, meaning income tax is not applied on contributions. Your employer will also contribute an amount – a minimum of 3 per cent. In these schemes, you pay a portion of your salary into a pension if you are employed. Public sector organisations are also increasingly turning to defined contribution schemes, as they are cheaper to run. Private employers are likely to offer a defined contribution scheme, where your total pension savings depend on the amount you save and the performance of your investments. ![]() ![]() Pensions and Retirement Exclusive Teachers forced to opt out of generous pension schemes, costing them £8k for every lost year Read More
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