How to manage your money in retirement

How much income you will need in retirement

It’s difficult to say how much each individual person will need in retirement. An organisation called Pensions UK has worked with independent researchers to look at the kind of things people say they want in retirement, and how much that could cost. They’ve created three different lifestyles – minimum, moderate and comfortable. These are called the Retirement Living Standards.

For example, to have the minimum lifestyle it’s estimated that a person living on their own (outside London) needs £13,400 a year. That’s after tax on any pensions has been paid and it presumes that you don’t have a mortgage or rent to pay in retirement. A minimum lifestyle would mean you could spend £55 a week on food shopping, £12 a month on takeaways, take a week-long UK holiday and to give £20 to family members for each birthday and Christmas present. But you wouldn’t be able to afford a car.

It’s worth looking at these Retirement Living Standards to give you an idea what income you’ll need. The next thing to do is to work out what income you’ll have in retirement.

By having a plan and keeping track of how much money you have coming in (your income) then you can get a clear picture of your finances and take control of your money.

However, if you have a defined contribution pension where you have a pot of money to invest, you’ll also need to make sure that money lasts. That’s because you can take money directly from your pension or take an income by moving your pension into something called ‘drawdown’. With these options, planning ahead will ensure you have enough money to live on and be as financially comfortable as possible.

If you are further out from retirement, then our guide on Financial Planning for Retirement will help you.

Understand what your retirement income will be

Your income in retirement might be made up from a variety of different sources.

State Pension

The State Pension is a regular payment from the government that most people can claim once they reach State Pension age and it is the foundation of most people’s retirement income. Currently you must be aged 66 to claim the State Pension, but this is due to go up to 67 by April 2028. You can find out what your State Pension age is and how much State Pension you might be entitled to at the government website GOV.UK.

To get the full new State Pension, you need 35 years of National Insurance or credits. The full new State Pension is £230.25 a week in the tax year 2025-26. This amount generally rises every year.

We have lots of information on State Pension on our State Pension hub.

Workplace pensions

There are different types of workplace pensions. You must be age 55 or over, increasing to age 57 from 6 April 2028 to take any money out of your pension unless you are ill or have the right to an earlier retirement age. An example of someone who might have this is a police officer or a member of the armed forces.

Defined benefit pension (also known as final salary or career average)

This is the type of pension where you, and your partner if you die first, will receive a guaranteed income in retirement from your current or previous employers. It is based on your earnings and the length of time you are/were in the scheme. You should ask your current or previous employers for details of how much this might be.

The most common defined benefit pensions now are for those in the public sector. Normally you have to retire to be able to receive your pension from a defined benefit pension.

Defined contribution pension

This is the type of pension where both you and your employer contribute to your pension pot. The size of your pension pot depends on;

1. how much you and your employer have paid in;
2. how long this money has been invested for;
3. how your pension investments have performed over that time; and
4. when you decide to take money out.

You have to decide what you want to do with your pension pot and it’s up to you to make sure it lasts. You don’t have to retire to take money out of your defined contribution pension.

Private defined contribution pension

You may have set up a private pension yourself with a pension provider. This could be because you were self-employed. It works in the same way as a defined contribution workplace pension, but you won’t have an employer contribution.

Benefits available to you in retirement

You may be entitled to age-related state benefits when you retire. If you are on a low income, you may be eligible for Pension Credit, help with your housing costs and heating bills, or Council Tax support. If you have special health needs, help is also available. You can find out about all the benefits available on the Age UK website which also includes a benefits checker.

Other income

You may have other income from savings or investments, or you might own rental property or rent a room to friends or family. Or you could still be working part time and have some salary. This should all be included in your budget.

Tax and your income in retirement

When you are working out how much money you’ll have in retirement, it’s important to remember that you’ll probably have to pay tax on your income.

State Pension and workplace or personal pensions

Income from the State Pension and workplace or personal pensions is all taxable. You can find more information on how pensions are taxed in our Guide to how your pension is taxed.

Other investments

If you have stocks and shares which you hold directly then you might need to pay tax on the dividends you receive. Similarly, if you have savings in the bank and you receive interest of £500 or over and you are a higher rate taxpayer or interest of £1,000 or over and you are a basic rate taxpayer then you’ll have to pay tax on the amount of interest above. If you have ISAs, then any amount that you take out is tax-free.

Plan how you want to take your pension

If you have a defined contribution pension then you’ll need to decide;

1. When you want to take money out (monthly, annually or as and when you need it);
2. How much you want to take out; and;
3. The way in which you should take it out of your pension.  You might have already made these decisions, though.  The main ways to access your pension are; drawdown (also known as flexible income), cash lump sums (also known as UFPLS or uncrystallised fund pension lump sums) or an annuity (also known as secure income). You don’t have to choose one over the other, instead you can use a mixture of all of these. Or you can decide on one course of action, such as moving all of your money into drawdown (minus the tax-free cash, which you’ve taken) but then decide later on that you’d like to buy an annuity.

There is a lot of information in our Retirement options guide on these options and it also explains about taxation.

Taking financial advice will help with making all these decisions as well as thinking about making your money last for your money for the rest of your life. For more information, see our guide Getting financial advice - Royal London.

Budget your spending

Your spending habits are likely to change in retirement. For example, you will no longer have work-related expenses and you may now be living on your savings rather than putting money away for the future. You’re likely to have more time for leisure and you may be at home more which means your fuel bills might go up. If you had a company car, you may need to replace this and if you used to pay for help around the home, you may now have time to do these chores or maintenance jobs yourself.

Drawing up a budget of what you think your spending will be like in retirement can help you work out how much money you need. You could start with your current spending and then think about how this might change.

You may spot savings in your current budget straight away and, with more time on your hands, you may be able to find better deals on your regular bills. You can get tips on how to do this in our guide ‘How to save money on bills’.