Calculating pension income needs

I was pondering recently the questions we ask at different stages of life. My seven-year-old daughter, for example, asks things like, ‘Why is the grass green?’, ‘Why are trees tall?’ and her favourite, ‘Why are you so old?’. Thankfully, so far, I’m able to answer them all.

Later in life, the questions become more complex: why are we here, what does it all mean and, again, how did I get so old? For those of us working in pensions, there’s another big question that many workplace pension members grapple with: how much will I need in retirement?

Supporting members as they prepare for retirement is a key responsibility. It calls not just for financial expertise, but for a real understanding of people’s aspirations, anxieties and everyday realities. The income someone needs in retirement isn’t a simple figure, it’s shaped by lifestyle choices, expected costs and evolving expectations of what a comfortable life looks like after work.

Many members won’t seek, or necessarily need, financial advice. So, in this article, we explore how to calculate pension income needs, using the Pensions UK Retirement Living Standards and practical examples to help you provide clear, supportive and empathetic guidance to scheme members.

Retirement Living Standards

The Retirement Living Standards provide a framework for discussing expectations and guiding pension planning. The standards are based on detailed research into the real-world costs of living for retired one-person and two-person households and are further split down into living inside and outside London. They’re updated regularly to reflect shifting economic and social conditions, with the latest figures announced on 3 June 2026.

• Minimum standard: This budget covers all essential needs, such as food, heating and transport, but allows for very limited discretionary spending. It’s sufficient for a basic lifestyle without many luxuries.
• Moderate standard: A moderate standard includes more financial freedom, such as occasional dining out, some leisure activities, and an annual holiday. It reflects the aspirations of many pension scheme members who wish to maintain a reasonable quality of life.
• Comfortable standard: This level supports regular holidays, more generous spending on leisure and hobbies, improved home environments, and greater flexibility. Achieving this standard is a goal for many, but it requires careful planning and sufficient pension provision.

These benchmarks allow workplace pension employees to set realistic expectations. They also enable members to visualise their own retirement lifestyle and link it directly to tangible financial goals. It should be noted that the figures are net of income tax and don’t include additional housing expenses such as a continuing mortgage or rent.

Mapping out retirement expenses

The cornerstone of calculating pension income needs is understanding the future expenses members will face. Members need to include:

• Housing (rent, mortgage, maintenance, council tax)
• Utility bills (gas, electricity, water, phone)
• Food and groceries
• Transport (car, public transport, insurance)
• Healthcare and insurance
• Leisure and entertainment
• Travel and holidays
• Personal items (clothing, haircuts, gifts)

If providing guidance to the workforce, perhaps through generic webinars, encourage members to review their current spending, identifying which costs may fall (such as work-related expenses or commuting) and which may rise (like healthcare or travel). Lifestyle changes often accompany retirement: some people take up new hobbies, others downsize their homes, and some choose to support grandchildren. Reflecting these individual choices in expense estimates is key to building an accurate picture of retirement needs.

Inflation: The impact on purchasing power

Even modest inflation can significantly affect retirement costs over time. When workplace pension advisers help members plan for the future, it’s vital to account for the rising cost of living. For example, using a typical inflation rate of 2.5% a year, an expense of £20,000 will rise to about £29,000 over 15 years. Illustrate these effects for members so they understand the importance of adjusting their pension targets as retirement approaches.

Some pension schemes provide inflation-linked benefits, but others do not. Advisers (and ideally employers too) should ensure members understand how inflation will affect their pension income and how they can protect their purchasing power.

Guaranteed income sources: Building the base

Most retirees receive some guaranteed income, such as the State Pension, defined benefit scheme payments, or rental income. When calculating required pension income, always deduct these guaranteed sources from the overall expense total. For example, if a member expects £12,500 a year from the State Pension and £3,000 a year from a defined benefit scheme, these amounts reduce the income needed from workplace pension savings. Members can easily check their expected state pension on the gov.uk website.

The State Pension age, entitlement and amount may change over time, so it’s important members regularly review these estimates. Defined benefit pensions can sometimes be overlooked in planning, so encourage members to gather all relevant information about their entitlements.

Calculating the pension income gap

The pension income gap is the difference between projected retirement expenses and guaranteed income. This gap must be filled by withdrawals from defined contribution pension savings, personal pensions or other investment vehicles.

To help members understand their pension income gap, highlight to them the following steps:

• List projected retirement expenses, factoring in inflation and lifestyle changes
• Subtract guaranteed income sources
• The remaining sum is the annual income needed from pension savings.

Workplace pension advisers could support members in calculating this gap or at least provide some examples or case studies and emphasise the importance of regular reviews as circumstances change.

How much should members save?

A widely used rule of thumb is the ‘4% rule’, which suggests that retirees can withdraw 4% of their pension pot each year without running out of money for at least 25 years. While this rule oversimplifies some complex realities (such as market fluctuations, tax and longevity risk), it provides a useful starting point for workplace members who aren’t receiving full holistic financial planning advice.

For example, if a member needs £20,000 a year from their pension savings, they should aim for a pot of £500,000 (£20,000 divided by 0.04). Encourage members to view this figure as a target rather than a guarantee, and to review their plans regularly in light of investment performance and personal circumstances. In addition, workplace pension advisers could provide webinars and discuss alternative withdrawal strategies, annuities, income drawdown and other options. Each approach carries advantages and drawbacks, and the right choice will depend on the member’s goals, risk tolerance, health and family situation.

Practical examples

Example 1: Minimum standard retirement

Imagine a member is about to retire and is targeting the minimum standard for outside London, £13,900 a year. If they expect £10,000 a year from the State Pension, they’ll need to supply £3,900 a year from workplace pension savings. Using the 4% rule, this means a pension pot of £97,500 (£3,900 divided by 0.04).

Example 2: Moderate standard with inflation

Another member, lives inside London, and aims for a moderate standard (£34,000 a year), planning to retire in 15 years. By applying 2.5% annual inflation, their expenses will grow to roughly £49,240 (£34,000 x 1.025^15). With inflation adjusted State Pension of £18,172 a year (£12,547.60 x 1.025^15) and say, £12,000 a year from rental income, they’ll need £19,068 from pension savings. Their target pension pot should be £476,700.

Example 3: Comfortable standard with lifestyle adjustments

Suppose a two-person household outside London aspires to the comfortable retirement standard (£62,700 a year) and are about to retire. They’ll both receive the full new state pension, so £25,095.20. Let’s say between them they’ll receive £15,000 a year from defined benefit schemes, and wish to travel extensively, adding £5,000 a year to their expense forecast. Their total projected annual expense is £67,700. Subtracting guaranteed income of £40,095.20, then £27,604.80 must come from pension savings, requiring a total pension pot of £690,120 or £345,060 per person.

Calculating pension income needs is not just about figures, it’s about supporting members as they envision their futures. Workplace pension advisers could help members:

• Revisit and update their calculations regularly, especially as expenses, inflation and income sources change.
• Consider unexpected costs, such as health emergencies or home repairs, by including a contingency fund.
• Explore suitable options for pension withdrawals, including annuities, flexible drawdown, or phased retirement.
• Use the Retirement Living Standards benchmarks to enable meaningful discussions about retirement expectations.
• And ultimately access full financial advice when needed for complex decisions or tax implications. There are many free financial planning tools available which you could direct scheme members to if you’re not providing full financial advice.

For workplace pension advisers, helping members determine their pension income needs involves merging financial calculations with a deep understanding of individual lifestyle ambitions. By referencing Retirement Living Standards, accounting for inflation, and providing clear, tailored guidance, you empower members to create plans that support a secure and fulfilling retirement. Regular reviews, ongoing communication, and holistic support are vital to ensuring pension scheme members achieve their goals and enjoy peace of mind as they transition to retirement.

This article was first published in Moneyfacts magazine, 10 July 2026.