How does average retirement income compare to average earnings?
It’s interesting to see how much disposable income the average pensioner today receives, in comparison to the average worker.
Average UK earnings – before tax or housing costs – are £30,420.
After income tax,
National Insurance and 5 per cent pension contributions (the recommended minimum), this is reduced to £23,111. On the face of it, this is about 50 per cent more than average retirement income.
However, this does not factor in housing costs. The average UK mortgage payment is £669 per month or £8,028 per year. If this is deducted from the average net income, the result is £15,083.
By a striking coincidence, it appears from these figures that average net income is almost exactly the same for today’s retired generation as it is for
today’s working generations.
This is clearly in large part due to the high cost of housing.
While the retired generation may largely own their own homes outright, and have no further mortgage payments to make, the working generation is spending a large chunk of its higher income on putting a roof over its head.
Consequently, net income seems to balance out to within £3 a year. It really is that close.
Is the average retirement income different for couples?
Couples tend to have more retirement income than single people.
Some reports even suggest that in 2017/18, retired couples received more than twice the income of single retirees.
This may partly be due to the fact that housing costs were included in the study – couples sharing housing will generally have lower overheads than someone on their own.
Another factor may be that those who are single upon entering retirement are likely to be divorced or separated, which may have had a significant impact on their past finances and thus their ability to save for retirement.
People in long-term stable relationships may have a greater capacity for building up retirement funds, as well as a stronger motivation for doing so.
Can I live comfortably on the average retirement income in 2020?
As the comparison above shows, the average retired income may not be much different – in terms of disposable income – than that of the average wage earner.
But this doesn’t necessarily mean that such an income provides a comfortable or desired standard of living (since many wage earners still consider themselves to be struggling or ‘just getting by’).
So what makes a ‘comfortable’ retirement income?
Ultimately it depends on
how you want to spend your retirement.
Research suggests that a couple in the UK need an annual combined income of £47,500 to have a retirement with few or no
money worries, while a single person would need £33,000.
This estimate assumes a lifestyle that includes:
- three weeks’ holiday in Europe (per year)
- food shops costing £56 per person per week
- £1,500 worth of clothes per person annually
These assumptions aren’t extravagant, but they aren’t penny-pinching either.
So if you see yourself living more modestly – e.g. shorter UK-based holidays,
cheaper food shops and fewer new clothes, you could get by on much less.
Research suggests that an annual income of £10,200 per person is enough for a frugal retirement – but any less might mean making some big sacrifices.
To give you an idea of how much you would need to save, a
£100k pension pot would give you an income of between £4,000 to
£5,000 a year, plus a
lump sum of £25,000 tax-free cash.
This doesn’t sound like much, but if you are also receiving the full new state pension, the total could be between £13,000 and £14,000 per year (plus the tax-free lump sum).
Bear in mind that the
state pension age is set to rise in the future.
Based on these figures, it’s clear that it’s advisable to aim for a pension pot of at least £100,000 or preferably more.
