Are you facing a ‘Pre-State Pension Gap’?

Becky O'Connor

by , Director (VP) Public Affairs

28 Feb 2023 /  

Couple behind computer looking at calculator

Can you afford to retire before you get the State Pension?

If you aren’t sure, or think the answer’s no - but you also think you’ll want or possibly need to retire before you get to State Pension age, then you may be facing what PensionBee’s called a ‘Pre-State Pension Gap’. This refers to the total amount of income you’d need to cover the years you spend not working before you get the State Pension.

As the government looks to increase the State Pension entitlement age to 68 (currently 66 and increasing to 67 from 2028) for today’s workers, the question of whether you’ve enough to retire earlier than the age you’ll get the State Pension may become more pressing.

According to PensionBee research, the ideal retirement age is actually 60. Meanwhile, the ‘healthy life expectancy’ age, up to which people can expect to live in reasonably good health, is 63. Millions of people find that they are forced to give up work earlier than the age at which they’d planned to formally retire, due to the need to care for others or because of their own ill health.

On this basis, we can assume that many people might either want or need to retire before they hit that State Pension age. But as things stand, unfortunately many people aren’t financially set up to do so, because without the State Pension, many simply won’t have enough in private savings to cover their income needs before they get it. Around four in 10 people don’t expect to be able to retire before they get the State Pension, according to our research. This translates to millions of people facing this ‘Pre-State Pension Gap’.

The extent of this gap will be different for everyone, but by way of example, the extra amount of income that someone retiring at 60 would need before getting the State Pension at 68 (the proposed incoming State Pension age, although we don’t know exactly when this rise will take place yet) is £134,000. That’s assuming they’d like an income of £17,000 a year in retirement. This is the amount the Pensions and Lifetime Savings Association says is about right for someone who’s in a couple and wants what it calls a ‘moderate’ lifestyle in retirement.

However in reality, the actual shortfall in savings that people are likely to face is probably going to be greater than this, as generally speaking, a typical private defined contribution pension pot, for someone who’s been paying in the minimum of 8% under Auto-Enrolment, isn’t going to be enough for a moderate lifestyle in retirement, even if someone retires at State Pension age. So for someone with an average pension pot, the shortfall in savings they would have to fill if they wanted to retire at 60 rather than 68 would be more like £150,000.

If you’re making higher than average contributions to your pension, perhaps with a decent employer matching scheme, and are also on a higher than average salary, this gap might be possible to fill. In fact we worked out that for most people, even on average salaries and with typical contributions and pot sizes, it should still be possible to retire at 67, even if the State Pension age goes up to 68, and to still enjoy a moderate living standard for this extra year.

How to work out your own ‘Pre-State Pension Gap’

Here’s how you can work what your ‘Pre-State Pension Gap’ might be and how much extra you’d need to fill it whilst still meeting your income needs after you receive the State Pension:

  1. Estimate how much annual income you’ll need (or want) each year of retirement. You may decide to target a higher amount earlier on in retirement than what you think you’ll need later, but bear in mind that income needs don’t necessarily fall as you get older.

  2. Work out when you’d ideally like to retire.

  3. Multiply the number of years between your ideal retirement age and State Pension entitlement age to understand the amount of income you’ll need to cover these pre-State Pension years: ‘the Pre-State Pension Gap’.

  4. Now consider what you’ve got in your pension pot currently and using a calculator (such as this one) estimate how much you’re likely to have at the time of your desired retirement age.

  5. Remember you’ll need some private pension AFTER you reach State Pension age. So find out how much State Pension you’re likely to get based on the number of qualifying years you’ve built up (which you can check here), then work out the difference between what you need for your living costs and what you’ll have from the State Pension. Then you can multiply this by 15 to 20 for the amount of income you’d need (in today’s money) to top up your State Pension right the way through retirement. But bear in mind that you might live even longer, so it could be prudent to budget for even more years than the average life expectancy. You might also be planning to leave some of your pension pot to relatives when you die, so may want to budget for this, too.

  6. Remember, when doing your calculations, that the amount of income you can take will depend on whether you’re planning to use income drawdown or buy an annuity - or potentially both at different points in retirement. Using drawdown means your pension can remain invested in the stock market, giving it a chance to continue to grow. Depending on the growth you get, you might find you can take more income than you originally planned through the years. Investment growth while you’re still contributing can also make a big difference to whether you can retire earlier than State Pension age. If you opt for an annuity, this can give more certainty of income and depending on rates as well as how long you live, this could result in a good return on your pension pot. However buying an annuity means you’d then miss out on future investment growth. This is why it can make sense to start retirement using drawdown before taking an annuity later on.

  7. Don’t forget to factor in housing costs. Whether you’re still paying off a mortgage or paying rent will also affect whether you can retire early and also how much income you’ll need in retirement.

  8. There may be the option to fill the ‘Pre-State Pension Gap’ with some part-time work, even if you’ve technically retired from your main job.

  9. Pension Wise‘s an excellent free guidance service from the government’s Money Helper website and if you’re over 50, this can help you work out your options. You might also find it useful to contact an independent financial adviser.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. Anything discussed on the podcast should not be regarded as financial advice.

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