What size pension do you need for a £20,000 income?

What size pension do you need for a £20,000 income?

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser.

What kind of annual income is enough for a comfortable retirement? According to the Pension and Lifetime Savings Association (PLSA), the “minimum” retirement living standards (RLS) – assuming no rent, mortgage or care costs – is about £10,000 per year for a single person. For a “moderate” lifestyle, £20,000 should suffice. With couples, the figures are closer to £15,000 and £30,000, respectively. This is all in today’s money, of course (i.e. 2021). These figures would be higher in the future to account for inflation.

Taking a more “moderate” pension lifestyle involving £20,000 per year, what kind of pension pot would you need to achieve this in 2021? Moreover, how might you build up such a pot? Below, our financial planning team at Cedar House addresses these two questions. If you’d like to find out more or discuss your own pension=with us, please contact our team for more information or to access personalised financial advice:

020 8366 4400 or


How much to achieve £20,000 per year?

Let’s set aside other sources of retirement income for the moment such as your state pension, any financial salary pensions or rental income. What kind of pension pot could give you £20,000 per year in retirement? One idea is to multiply this figure by 25, to cover the years leading up to your average life expectancy – from your likely age of retirement. 

In 2020-21, for instance, the state pension age is 66. In 2021, the UK’s average life expectancy is about 81; i.e. a difference of 15 years. Give yourself 10 extra years to account for inflation and also the possibility that you might live a bit longer, and you arrive at a required pension pot of about £500,000 to provide a “moderate” lifestyle in retirement.

This, of course, simplifies things greatly. Your goals and financial situation may require a much smaller – or bigger – pot. Speaking with a financial adviser will greatly help clarify your own case.


How to attain £20,000 annual retirement income

Again, the strategy appropriate for you to employ may be different from others. Yet there are some common ideas for retirement savers to consider. First of all, your state pension can form an important part of the £20,000 target. In 2020-21, the full new state pension gives £9,110.40 per year – rising in line with inflation, and lasting indefinitely throughout your retirement. To get this amount, you need 35 years of qualifying National Insurance Contributions on your record. To receive any state pension at all, at least 10 such years are required.

This gets you almost half-way to your annual income target. What about the rest? Assuming you have no other sources of income (e.g. rent from tenants), your workplace and/or private pension pot(s) will need to make up just over £10,000 per year – after fees and taxes. This will also need to rise at least 2% per year to match the Bank of England’s (BoE) inflation target.

Broadly, there are two ways that a pension pot could provide that annual sum. First of all, you could use it to buy an annuity – i.e. a financial product which gives a guaranteed lifetime income in retirement, typically linked to inflation (e.g. the Consumer Price Index). In 2021, annuity rates are currently quite low due to the historically-low base rate, which currently stands at 0.10%. In early 2020, for instance, some of the best deals stood at 5.2% for a 65-year-old. As such, to get a £10,000 income from such an annuity would have required a pension pot of around £200,000.

The second way to generate £10,000 from your pension pot is to keep it invested, and also take an income from it gradually (i.e. “income drawdown”). Here, at least two factors will affect which choice of investments you settle on to produce this level of income. The first is your attitude to risk. Are you a naturally “cautious” investor who has little stomach for stock market volatility? Or are you a more “adventurous” investor who is happy to see your portfolio (and income) fluctuate in value? It could be that you are somewhere in the middle! The second is how big your pension pot is. The larger the pot, the less “risky” your investments need to be to generate £10,000.

Equities, for instance, are likely to generate a higher return than bonds. However, they also tend to move up and down in value in the short term – even as they usually rise over the long term. A “cautious” investor with a large pension pot, therefore, might choose to place more investments into “safer” assets like bonds to achieve their £20,000 target. An “adventurous” investor with a small pot, however, may be happy to assign more capital to equities in retirement to achieve the target (although this may involve taking less income in certain months, during a bear market).



Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:

020 8366 4400 or


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