The Retirement Newsletter: Looks like I had my pension income maths wrong

Issue Number: -62 — getting the maths right

Nov 13, 2022

Looks like I had my pension income maths wrong — Photo by StellrWeb on Unsplash

Welcome

Welcome to issue -62, where, this week, I get my tax calculations correct!

Money

I am not a financial advisor. I am writing about what I have read over the years about money and preparing to retire. What follows is not financial advice.

So, what sort of retirement do you want?

I first wrote about this back in August 2021 in Issue Number: -126 — What will be your type of retirement?, and in that issue, I wrote about three levels of retirement that I defined as:

Essential — what is the least amount of money you need to survive? To live? To get by? Not the most comfortable way to be retired, but at least you can be retired and have some freedom, albeit limited by money.
Moderate — a comfortable retirement. A retirement where you are not overly limited by or worried about money. A retirement where you can travel and do things you want to do.
Luxury — a retirement where money isn't a serious concern. You can't go mad, but you can afford some very nice holidays and have a very comfortable lifestyle.

In How much money will I need for an Essential, Moderate (Comfortable) or Luxury retirement? (also in August 2021), I looked at the cost of the different retirement lifestyles. In the article, I used the data from Which? for the different retirement lifestyles:

Table 1: Pension income - August 2021 (taken from Which?)

In April 2022, Which? updated the figures, and curiously, some values went up and some down.

Table 2: Pension income - April 2022 (taken from Which?)

I have always assumed that the values in Which? were net and not gross — the article doesn't say. Hence, in How much money will I need for an Essential, Moderate (Comfortable) or Luxury retirement? I attempted to calculate the gross income required, and this is where I made a mistake. I thought you continued to pay National Insurance on ALL income until you were 67. You do not. You don't pay it on pension income. Don't believe me? You can read it here on Do you pay National Insurance on your pension?which is a UK Government run website and says:

"You don't pay National Insurance contributions on any payments you get from a pension scheme including guaranteed income from an annuity."

This means I only have to consider income tax and not factor in National Insurance.

Doing the maths

At the time of writing — November 2022 — the tax allowance for a single person in the UK was £12,570 per year, with tax bands as follows:

Table 3: UK Tax Bands (correct as of Monday November 7, 2022)

So, the first £12,570 of your pension income is tax-free.

With National Insurance, you start paying the tax if you earn over £12,570 per year. The rate you pay is 12%, plus an additional 2% on anything above a certain threshold.

Initially, I had factored in National Insurance and Income Tax into my gross pension calculations, and this gave:

Table 4: Pension gross income WITH National Insurance

The £58,000 for a married couple luxury is marked as ‘approx’ as to get to £58,000, you are pushed into the 40% tax bracket and also incur the additional National Insurance 2% charge, which I have not factored in.

Now, if I have my maths correct, without National Insurance, it means the new gross income figures needed to hit the net incomes in table 2 are:

Table 5: Pension gross income - income tax only

Again, the £54,000 for a married couple luxury is marked as 'approx' because to get to £54,000, you move into the 40% tax bracket.

So, not a massive change between the values in tables 4 and 5, which is odd as I expected a more significant impact.

In some ways, this is good news as it means my original calculations and assumptions about my pension income and the level of 'comfort' I could expect in retirement were not too far off.

Not having to pay National Insurance on my pension income is good news, as it puts money back in my pocket — just not that much. And this means I don't have to draw down so heavily on my savings to bridge the gap between my early retirement income and the 'full' pension I will get when my UK state pension kicks in at 67.

But I need to be careful. I need to check that if I stop paying National Insurance when I retire, assuming it is before I am 67, I get enough National Insurance contribution years to qualify for the full UK pension.

Please note I am not a financial advisor. I am writing about what I have read over the years about money and preparing to retire. The above is not financial advice.

Reflections

We are having a very odd autumn in the UK.

We had a few cold mornings at the start of October; it has been very mild since then. Records are being broken for the warmest November days and nights.

So far this month, we have had daily high temperatures in the high teens (centigrade); some nights, it hasn't dropped into single digits (again in centigrade). The other day I was out for a walk, and it was over 17 ºC. These temperatures are unheard of in the UK for November.

Besides the warm weather, we have had some quite violent (by UK standards) storms. We have had rain in the UK, the likes of which I have only seen before in the tropics. We need the rain after the hot, dry summer, but not like it is falling as it is running off the land and not soaking in.

On a recent walk through my local woods, I spotted some trees starting to emerge into bud. Some trees I would have expected to have dropped all their leaves by now still have them — even after the high winds and heavy rain.

Don't get me wrong; I am not moaning about the mild autumn, as I am saving money on heat. But I am worried that things will 'average out', and we will get an unbelievably cold spell at some point.

Judging by the number of berries I have seen on the trees and bushes, we should be in for a very harsh winter if the old wives' tale is correct.

Useful links

UK Government Website:

Next week

In next week's issues, I will be looking at imposter syndrome and retirement.

Thanks

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Until next time,

Nick

PS, If you have something you would like to contribute to the newsletter — a story, advice, anything — please get in touch.

Please note: I am not a financial advisor. My writing about money and financial matters is based on things I have read over the years about money and preparing to retire. IT IS NOT FINANCIAL ADVICE.

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