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Forget the State Pension! Here’s how to build a £50,000 retirement income

The average UK full-time salary is £29,009. So if you are earning £50,000 a year, congratulations, you’re well above the average. If you have an income of £50,000 a year in retirement, you’re a rare breed. But a growing number are managing it, new official figures show.

Big money

The number of pensioners with incomes of £50,000 or more jumped from 418,000 in 2016/17 to 474,000  today, a rise of 13% in just two years. That’s still a small proportion of the UK’s 12m pensioners, just 4%. Yet it may be possible to join them, if you make an effort now.

It won’t be easy, obviously. As Tom Selby, senior analyst at investment platform AJ Bell points out, today’s wealthy retirees are mostly post-war baby boomers who benefited from rising house prices and generous defined benefit pensions.

Millennials won’t get those final salary pensions and will blow a large chunk of their incomes on mortgages to buy those pricey houses.

Take action now

Yet some of you could do it, if you make investing for the future your financial priority and really put your back into it. Even if you don’t hit £50,000 pension income a year, doing something is always better than doing nothing.

You won’t get anywhere near that if you rely on the State Pension, which pays just £8,767.20 a year. With luck, you’ll have access to a generous company pension, although final salary schemes are now thin on the ground.

Set your target

If you want a simple target figure, try £1m. My colleague Roland Head calculates this could generate retirement income of £54,420 a year (and he tells you how much you need to save each month to get it too). With your basic State Pension on top, that would give you £63,187 a year – well over £50,000.

So maybe you don’t need to aim quite that high. If you can put together a pot of £750,000, then with your State Pension you would have £49,582 a year. If you have other sources of income, such as a company pension, your target could be a lot lower than that. 

These are huge sums, but if you start early enough you could have 30 or 40 years to build them. With a self-invested personal pension (SIPP), you could claim tax relief on contributions at either 20%, 40% or 45%, which would ease the pressure on your pocket. Alternatively, a Stocks and Shares ISA allows your money to grow free of tax. Selby suggests the following five steps towards a £50,000 retirement income.

1. Start saving early

This gives your portfolio time to benefit from the magic of compound growth.

2. Invest in stocks and shares

This is higher risk, but should generate higher terms over the longer run.

3. Keep costs down

Hefty investment platform and fund fees can reduce your final pension pot by thousands of pounds. You can find the best value Stocks and Shares ISA platforms here.

4. Manage withdrawals

Pension pot withdrawals are subject to income tax, so spread them out to reduce the bill.

5. Retire later or work part-time

This way you can keep building your pension pot while minimising withdrawals.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.