Five pension income facts everyone should know before reaching retirement age

By Linda Howard

New research conducted by the Pensions and Lifetime Savings Association (PLSA) has discovered that nearly half of non-retirees (46%) do not know how much they will receive each year from State Pension payments.

The study of 2,075 people across the UK was conducted by Yonder Consulting ahead of this year’s Pensions Awareness Week, which runs until September 17, and found that only 53 per cent of respondents knew that the Department for Work and Pensions (DWP) delivers the State Pension, which is worth more than £9,000 per year.

However, some 70 per cent of those aged 55 and over were found to be more likely to correctly identify how much to expect, compared to only 40 per cent of those aged 18-34.

The survey also showed that over half of working age people with a pension are worried they are not saving enough for their retirement (56%), with only one in five (21%) confident that the amount they are saving in a pension is enough to let them live the lifestyle they want when they stop working.

In fact, three-quarters (75%) of people believed they should save extra into their pension to boost their retirement savings, with the average additional contribution being £68 per month.

The survey forms part of activity by the PLSA for Pensions Awareness Week to help savers better understand pensions and dispel some of the myths about retirement saving.

From the survey data, five key areas have been identified to help savers improve their pension knowledge.

1. A full State Pension is worth £9,339

Most people in the UK who work, or perform caring responsibilities, will be eligible for a full State Pension if they have paid National Insurance contributions or been a carer for 35 years.

2. Most people are automatically enrolled into a workplace pension

The UK Government helps people make extra pension savings on top of their State Pension by ensuring most workers are automatically enrolled into a workplace pension scheme.

Under the Pensions Act 2008, every employer in the UK must put qualifying staff into a workplace pension scheme and contribute towards it.

There are two types of workplace pension:

  • those based on the contributions made plus returns from investing the fund - defined contribution pensions
  • those linked to your salary - defined benefit pensions

If you are not automatically enrolled into a workplace pension, you can either ask to join it or save into one some other way.

The Automatic Enrolment programme has more than 10 million additional people saving into a workplace pension.

3. Tools that help you assess how much to save and how much you will need in retirement

For many people, the best way to have an adequate income in retirement is to save gradually over the whole of their working life and save what they can afford. However, depending on their financial circumstances, some may prefer to save less when they are younger and more when they are older, especially if they expect to receive an inheritance before they retire.

Based on in-depth research, the PLSA produced its Retirement Living Standards to help savers picture their future life in retirement at three different levels of expenditure - Minimum, Moderate and Comfortable.

A single person will need:

  • £10,000 a year to achieve the minimum living standard
  • £20,000 a year for moderate
  • £30,000 a year for comfortable

Couples will need:

  • £15,000 a year to achieve the minimum living standard
  • £30,000 a year for moderate
  • £45,000 a year for comfortable

Just be aware that these expenditure levels do not include mortgage or rent payments.

4. You have choices to make about drawing your pension

When people reach retirement, they can choose how they draw their workplace pension savings.

For example:

  • If you have a defined contribution scheme, you can select a product that pays a fixed amount every month - an annuity
  • You can take a more flexible option where you can vary what you take out but the amount is not guaranteed - a drawdown
  • You can take cash as a lump sum

Savers can also choose a mixture of these approaches.

Savers who have a defined benefit pension, can choose to take their whole pension as a regular income - sometimes with a cash lump sum, often upgraded in-line with inflation, or after taking financial advice - for pots over £30,000 they can choose to transfer their pension to a defined contribution pension.

5. Information and advice is available

To help navigate the numerous options there is free guidance and information available from the UK Government-backed MoneyHelper and Pension Wise services.

Commenting on the study findings, Nigel Peaple, Director Policy & Advocacy, PLSA, said: “It is striking that so many people do not yet know the basic elements of pension saving, such as how much the State Pension is worth, how much they need to save, and the choices they must make about how to draw their pension at retirement.

“This Pensions Awareness Week, we want savers up and down the UK to take stock of their pension saving and to check that they are saving the right amount to achieve the retirement lifestyle they want.

“It’s never too late to start thinking about your pension. Using the wide variety of tools available, including the PLSA’s Retirement Living Standards and MoneyHelper’s Pension Calculator, savers can gain a better understanding of what types of lifestyles they can afford to live in retirement given their current saving habits.”

A total of 2,075 people across the UK took part in the August survey carried out by Yonder Consulting.

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