How Do I Work Out My Total Retirement Income?

Retirement income rarely comes from one place

When people think about retirement, they often focus on their biggest pension. They might say: "I've got £300,000 in my pension. What income will that give me?" But that may only be part of the picture.

• £70,000 in an old workplace pension;
• a small final salary pension;
• £40,000 in ISAs;
• cash savings;
• and a State Pension due several years later.

Look at those individually and retirement can feel confusing. Put them together and the picture becomes much clearer.

Steve's observation

One of the biggest differences between having retirement assets and having a retirement plan is knowing what job each bit of money is supposed to do.

A pension statement tells you: "You've got £180,000." Useful. But I want to know: when is that money needed? How much income does it need to provide? What other income is arriving at the same time? That's when the pile of statements starts turning into an actual retirement.

Step 1 — Start with the income you need

Before calculating your retirement income, know what you're trying to fund.

If you haven't worked that out yet, start with our completed guide ODW-RP-005 — How Much Income Will I Need in Retirement? That gives you the expenditure target. RP-007 is about working out where that income might come from.

Step 2 — Get your State Pension forecast

For many people, State Pension will form an important part of later retirement income. Don't simply use the full headline State Pension figure. Use your own forecast.

We've covered this in detail in ODW-RP-006 — How Much State Pension Will I Get? For this exercise, write your personal State Pension figure into the retirement-income map together with its starting age.

Step 3 — Find every defined benefit pension

These can be particularly valuable because they generally promise an income based on the scheme's rules rather than simply giving you a pot of money to manage yourself.

You might hear these called:

• defined benefit pensions;
• final salary pensions;
• career-average pensions;
• salary-related schemes.

Find the latest statement for each one. Record:

• Expected pension income
• Normal pension age
• Any options for taking it earlier or later
• Whether and how it increases
• What survivor benefits may be available

Don't simply add the annual pension to today's income figure if it doesn't start until later. Timing matters.

Step 4 — List your defined contribution pensions

These are pensions where you have accumulated a pot of money.

• current workplace pensions;
• old workplace pensions;
• personal pensions;
• SIPPs.

For each pension record:

• Current value
• Current contributions
• Expected employer contributions, if applicable
• Where it is invested
• Charges
• Normal or permitted access
• Retirement options

If you've lost track of old workplace pensions, use our completed guide ODW-WP-014 — How Do I Find an Old or Lost Workplace Pension?

And don't automatically combine several pensions merely because retirement is approaching. Our completed guide ODW-WP-013 — Should I Combine My Old Workplace Pensions? explains why the decision needs more thought than simply making the paperwork look tidier.

A pension pot isn't the same thing as pension income

This distinction matters. Suppose you have £300,000 in a defined contribution pension. You shouldn't put £300,000 into the annual retirement-income column. That's capital.

The income ultimately available from it depends partly on how you use the pension. You may:

• leave some invested;
• take flexible withdrawals;
• use some to provide guaranteed income;
• take lump sums;
• or combine different methods.

We've already explained the broad options in ODW-WP-016 — What Are My Options for Taking Money From My Workplace Pension? And if you're trying to understand the relationship between a pot and possible income, see ODW-WP-017 — How Much Retirement Income Could My Workplace Pension Give Me?

Step 5 — Add savings and cash

Cash can play a useful role in retirement. But again, distinguish between capital and income. Having £50,000 in cash does not mean you have £50,000 a year of income. It means you have an asset that could potentially be used to support expenditure.

• bank savings;
• building-society accounts;
• fixed-term deposits;
• Premium Bonds;
• emergency reserves.

Decide what job the money is meant to do. Perhaps:

• emergency reserve;
• first few years of retirement;
• large purchases;
• holidays;
• home repairs;
• or part of the income bridge before other pensions start.

Step 6 — Add ISAs and investments

ISAs can also form part of retirement planning. Money held inside an ISA can potentially provide accessible capital, investment income or withdrawals to support spending.

• accessible capital;
• investment income;
• or withdrawals to support spending.

One important difference from taxable pension income is that income and gains within an ISA are generally tax-exempt. That can make ISAs useful alongside pensions when structuring retirement cash flow.

But an ISA investment can still rise and fall in value if it's invested. Tax efficiency doesn't remove investment risk.

Step 7 — Add other income

Retirement income can also come from outside traditional pensions. Examples might include:

• rental property;
• business income;
• part-time employment;
• consultancy;
• savings interest;
• investments;
• trusts;
• overseas pensions;
• or other regular income.

Record each one separately. And ask: how reliable is it? Rental income isn't the same as a guaranteed pension. Part-time earnings stop if you stop working. Investment income can vary.

A useful retirement plan distinguishes between guaranteed or relatively predictable income and income dependent on markets, work or other variables.

Build a simple retirement-income table

You don't need sophisticated software to start. The point isn't to make the spreadsheet perfect. It's to make the retirement visible.

Step 8 — Put everything on a timeline

This is where the calculation gets really useful. Instead of one retirement-income number, you may have several stages.

Same retirement. Very different jobs for the private assets at different ages.

Gross income isn't the same as money available to spend

This is important when adding different retirement income sources. State Pension is taxable income. Most private pension income is also taxable, although some pension benefits may potentially be taken tax-free within the applicable rules and allowances.

Rental income and employment can also be taxable. By contrast, withdrawals from ISAs are generally tax-free.

So if your target is £36,000 available to spend, you cannot necessarily assume £36,000 of gross retirement income equals £36,000 in your bank account. Your tax position needs considering across all taxable sources.

Be careful adding State Pension to other taxable income

State Pension is taxable, even though tax is not normally deducted directly from the State Pension payment itself. HMRC looks at your wider taxable income.

• State Pension;
• workplace or personal pension income;
• employment;
• rental income;
• savings or investment income where taxable.

This is another reason to map the whole retirement rather than assess each source independently.

Couples need two columns and one household total

For couples, record each person's income separately. Then create a household total income and compare that with household expenditure.

This matters because the two people may retire at different ages, reach State Pension age at different times, have different pension types and have different tax positions.

Don't forget the survivor calculation

Your retirement-income map should also answer: what happens when there is only one of us? Some income may continue in full. Some may reduce. Some could stop. Some household expenditure will fall. But many costs remain.

So alongside "our retirement income" also calculate "survivor retirement income." That can reveal vulnerabilities that aren't obvious while both partners are alive.

What's guaranteed and what's flexible?

Separating retirement resources into two broad groups helps answer an important question: how much of our essential expenditure is covered without relying on investment markets?

Income with greater certainty — potential examples:

• State Pension;
• defined benefit pension;
• annuity income.

Flexible or variable resources — potential examples:

• drawdown pensions;
• ISAs;
• investment portfolios;
• cash;
• property income;
• employment.

There isn't one correct percentage. But understanding the balance between reliable income and flexible assets is extremely useful.

Don't count the same money twice

This sounds obvious. It happens surprisingly easily. Suppose you have a £300,000 pension. You estimate it could provide a certain level of withdrawals. Then you also list the £300,000 as money available for future spending. That's effectively counting the same asset twice.

Likewise, if you intend to use savings to fund the early years, don't also assume the full original savings balance still exists later. Your retirement plan needs to follow the money through time.

Don't use today's pension values as guaranteed future values

If you're still several years from retirement, your pension may receive more contributions, grow, fall, incur charges or change investment value. Your pension may:

• receive more contributions;
• grow;
• fall;
• incur charges;
• change investment value.

Future projections therefore contain assumptions. Treat projected values as illustrations rather than guaranteed outcomes.

What Should I Do Next?

Create a one-page retirement-income inventory. For every pension, asset and income source write down: current value or expected income; owner; starting age; whether it's guaranteed or variable; whether it's taxable.

Then place each source onto a retirement timeline.

Finally compare the income available in each stage with the spending target you established in ODW-RP-005 — How Much Income Will I Need in Retirement? Now you'll be looking at an actual retirement-income picture rather than a collection of unrelated accounts.