What is a Good Monthly Retirement Income (UK)

Retirement planning is one of the most important financial goals you can have, and a key part of that planning is determining how much income you'll need each month to maintain a comfortable lifestyle. While there is no one-size-fits-all answer to what constitutes a "good" monthly retirement income in the UK, several factors influence this figure, including living expenses, lifestyle choices, and the types of income sources you may have during retirement.

Average Retirement Income in the UK

The average retirement income in the UK can vary depending on whether you're looking at private pensions or combined income from multiple sources. According to research from the Pension and Lifetime Savings Association (PLSA), to maintain a comfortable retirement income, a couple would need around £34,000 a year, while a single person would need about £23,000 per year. This equates to approximately £2,833 per month for a couple and £1,916 per month for a single individual.

This "comfortable" level allows for a range of activities, such as owning a car, regular holidays, dining out, and engaging in hobbies. It also means being able to afford some home improvements and perhaps financial support for your children or grandchildren.

For those looking for a moderate retirement income, which provides for basic living costs with some luxuries, the PLSA estimates that a single person would need around £20,800 annually, while a couple would require £30,600. For the minimum retirement standard, a single person would require about £12,800 annually (£1,067 per month), while a couple would need £19,900 annually (£1,658 per month).

Income Tax on Retirement Benefits

It's important to remember that your retirement income is subject to income tax. In the UK, your state pension and other pension income are treated as taxable income. However, you benefit from a personal allowance, which means the first £12,570 (as of the 2024/2025 tax year) of your total income is tax-free. Income above this threshold is taxed at the standard rates:

  • 20% for income between £12,571 and £50,270

  • 40% for income between £50,271 and £125,140

  • 45% for income over £125,140

Understanding how tax impacts your retirement income is crucial in ensuring you have enough left over to cover your monthly expenses comfortably.

What is a Comfortable Retirement Income?

The concept of a comfortable retirement income refers to having enough money to cover your essential living costs while also affording leisure activities such as holidays, dining out, and regular hobbies. For many people, this also includes affording a car, home improvements, and the ability to financially support family members if needed.

A comfortable retirement will vary depending on individual circumstances, but the PLSA's Retirement Living Standards suggests that around £23,000 a year for a single person or £34,000 a year for a couple is needed to maintain this level of living.

Sources of Retirement Income

Retirement income in the UK can come from a variety of sources. Common options include:

  1. State Pension: As of 2024, the full new State Pension is £203.85 per week, or roughly £10,600 a year. This is a guaranteed income but might not be enough to cover all your expenses.

  2. Workplace Pension: If you’ve been enrolled in a workplace pension, the amount you receive will depend on how much you've saved and whether it's a defined benefit (final salary) or defined contribution pension. Most workplace pensions allow for a 25% tax-free lump sum, with the remainder taken as taxable income.

  3. Personal Pension: You may also have a personal pension or Self-Invested Personal Pension (SIPP). These allow for greater flexibility in how you access your money, but how much you have depends on your contributions and investment returns.

  4. Investment Income: Some retirees rely on income from investments, such as dividends from stocks or rental income from properties.

  5. Savings: Any personal savings, such as ISAs, can also supplement your retirement income. The advantage of ISAs is that the income is tax-free.

Best Income Funds for Retirement UK

For those relying on investment income in retirement, income funds are a popular choice. These funds focus on generating a steady stream of income, usually from dividends, interest from bonds, or a mix of both. Some of the best types of income funds for retirement in the UK include:

  1. Equity Income Funds: These funds invest in dividend-paying companies, providing a regular income stream.

  2. Bond Funds: These funds are more conservative and focus on generating income through interest from government or corporate bonds.

  3. Mixed Asset Funds: These funds offer diversification by investing in both stocks and bonds, providing a balance of income and growth.

Popular income funds in the UK include Vanguard’s LifeStrategy Funds, Fidelity Multi-Asset Income Fund, and Baillie Gifford Multi-Asset Growth Fund.

How Much Can You Put into a Pension?

Pension contributions are a crucial part of building retirement income, and there are annual limits to how much you can save into pensions tax-free. For the 2024/2025 tax year, the annual allowance is £60,000 or 100% of your earnings, whichever is lower. This includes all contributions from both you and your employer.

Additionally, pensions offer a great way to reduce your tax bill, as contributions are eligible for tax relief at your highest rate of income tax. For example, a basic-rate taxpayer gets 20% tax relief, and higher-rate taxpayers can claim 40%.

Can You Achieve a Comfortable Retirement Income?

Achieving a comfortable retirement income involves a combination of planning and saving. Here are some steps to consider:

  • Maximise pension contributions: Taking full advantage of employer contributions, tax relief, and personal contributions can help you build a larger pension pot.

  • Review investments: Make sure your investments align with your retirement goals, focusing on income-generating assets if that suits your needs.

  • Plan for inflation: Your retirement income needs to keep pace with inflation, so consider index-linked income sources such as annuities or income funds.

  • Consider downsizing: Some people choose to downsize their homes or release equity to generate additional retirement income.

Conclusion

Determining what constitutes a good monthly retirement income in the UK depends on your lifestyle, location, and financial goals. For a comfortable retirement, the PLSA suggests that £23,000 to £34,000 a year is a good target, though the average UK pension income may be less than that. Be sure to account for taxes on your pension and other income sources to understand how much you’ll truly need to live comfortably in retirement.