Where will my retirement income come from?

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When you retire, you won’t be paid to work anymore – so where might your money come from? There’s a good chance you could get it from multiple sources. And knowing what these sources might be could help you plan for retirement. 

Defined contribution or defined benefit plans

Some of your money could come from a defined contribution (DC) pension plan. These are sometimes called ‘money purchase’ plans.

Some might come from a defined benefit (DB) pension plan. These are also known as ‘final salary’ or ‘career average’ plans.  

Don’t forget, you can have several pension plans.

Defined contribution plans

If you have a DC plan, you pay into it. Your employer will too if they set the plan up for you. 

A maximum of £60,000 (or 100% of your earnings, whichever is lower) can normally be put in before you face a tax charge. 

You can get tax benefits, like tax relief, on your payments into your plan. The money in your plan is invested, giving it the potential to grow. 

The income you can get from your plan is based on how much has been paid in and investment performance. Remember, the value of investments can go down as well as up and could be worth less than was paid in.

You can withdraw money from the age of 55 (rising to 57 from 6 April 2028). 25% of your plan’s value is normally tax-free, while the remaining 75% is taxable.

Defined benefit plans

How much money you get from a DB plan depends on your salary when you retire or leave the pension scheme. Or sometimes it’s calculated using your average salary. It also depends on how long you’ve been part of that pension scheme. 

You’ll be paid a pension income for the rest of your life with a DB plan. The age at which you can start taking your money could vary depending on the scheme. 

You may be able to take a tax-free lump sum from a DB plan. Or you may be able to take your whole plan as a lump sum. Find out more on MoneyHelper. 

The State Pension

The State Pension could make up a big portion of your total income in retirement – but this alone might not be enough to fund your life in retirement. 

Men born on or after 6 April 1951 and women born on or after 6 April 1953 can claim the new State Pension when they reach State Pension age. That age is currently 66 (rising to 67 by 2028). 

The full amount you can get is just over £10,600 a year. If you’re not getting – or you’re not on track to get – this much, voluntary NI contributions could potentially help boost your State Pension. You can read our article for more information. Your State Pension is taxable. 

Individual Savings Accounts (ISAs)

Some people might use money they have in an ISA as a source of income in retirement.

For example, there are cash ISAs, which you can save into and potentially earn some interest. There are other types of ISAs where your money’s invested. Again, keep in mind that the value of investments can go down as well as up and could be worth less than was paid in.

A Lifetime ISA (LISA) is a type of ISA that’s intended to help people save for first homes or for retirement. You can start saving into one between the ages of 18 and 39. You can put up to £4,000 per year into one of these until you’re 50 (you can just save into it or your money can be invested – your choice). The government will give you a 25% bonus, capped at £1,000 a year. 

The money you take out of a LISA is tax-free. You won’t pay a withdrawal penalty as long as you don’t access the money until after you’ve turned 60. 

Property

Some retirees may get some of their money in retirement from rental income if they have buy-to-let properties. But getting a regular income from property will depend on the property being let at all times, which may not always be possible.

Remember, you pay income tax on rental income.

Will I have enough income in retirement?

Whether you’ll have enough income to fund your life in retirement depends on the kind of lifestyle you want.

The Retirement Living Standards – from the Pensions and Lifetime Savings Association (PLSA) – show how much money you might need for a minimum, moderate or comfortable lifestyle in retirement. 

According to the Standards, a single person could need £12,800 per year to achieve the ‘minimum’ lifestyle. The full new State Pension falls short of this by over £2,000, so it’s important to have other ways of supporting yourself.

You can read our How much do I need to retire? article to get an idea of how much you might need.

What could my next steps be?

Once you understand where your money is likely to come from, you can get thinking about whether you’re on track for your ideal retirement.

For example, you can use our pension calculator to understand how much income you could get from your pension pots in future. 

If you’ve thought about where your own money’s going to come from and you’re concerned you’re not on track for the life you want, try not to panic. You could instead see this as an opportunity to decide what to do about your finances going forward. 

Overall, it’s important to understand that your State Pension alone may not give you the lifestyle you want in retirement, but there are various ways to save for your future.

If you’re a Standard Life customer and you’d like to check in on how your pension savings are doing, you can do this online or on our app. You can find out more about our online services on our website, or visit our support page for FAQs and ways to get in touch.

The information here is based on our understanding in August 2023 and shouldn’t be taken as financial advice.

A pension is an investment and its value can go down as well as up and may be worth less than was paid in.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

Standard Life accepts no responsibility for information in external websites. These are provided for general information.