INVESTMENT MATTERS
RETIREMENT INCOME
How much will you need as a retirement income?
One size does not fit all
Final salary pension schemes, which have now
largely disappeared from the private sector
landscape, used to target pension benefits equal to
a particular proportion of the last year’s earnings
for long-serving employees – typically two thirds
or a half. In practice, that target was rather
arbitrary because it ignored both the impact of tax,
particularly relevant for higher earners, and the
benefit of state pensions, which is proportionately
more important for low earners.
A better estimate
The Department for Work & Pensions (DWP) has
put its mind to finding a more accurate target for
income in retirement. It has arrived at a
‘replacement rate’ as a percentage of preretirement earnings (adjusted for inflation)
between age 50 and state pension age. For each
given band of earnings, the replacement rate is
meant to allow a person ‘the same broad living
standards in retirement’ as they enjoyed when
working.
Pre-retirement
Replacement
earnings band
rate (%)
Less than £12,200 ......................................80
£12,200 - £22,400......................................70
£22,400 - £32,000 .....................................67
£32,000 - £51,300 .....................................60
Over £51,300 ..............................................50
A missed target
The DWP’s calculations were designed to help it
assess the extent to which the government’s two
major pension reforms would reduce the number
of people facing an inadequate retirement income.
The single-tier state pension, due to be introduced
in 2016, and automatic enrolment, being phased
in over the next five years, are both radical new
approaches to retirement provision which, on the
face of ]