Inflation drives 18% surge in “minimum” cost of retirement

Retirees trying to achieve a basic standard of living have seen their costs soar over the past year due to high inflation. We explain how much you now need to retire comfortably and how to boost your pension savings

The cost of a “minimum” standard of living in retirement has soared by almost 20%, as retirees face a big jump in food and energy bills.

Pensioners now need an annual income of £12,800, up from £10,900 a year ago - an 18% increase - to achieve a basic lifestyle. For a couple, a combined annual income of £19,900 is needed, up from £16,700.

This basic retirement is one of three “retirement living standards” promoted by the Pensions and Lifetime Savings Association (PLSA), designed to help retirees understand how much they need to save for retirement.

The minimum level includes a week’s holiday in the UK, eating out once a month and some affordable leisure activities twice a week.

There are also “moderate” and “comfortable” living standards, which include additional expenses like more holidays, theatre trips and running a car. 

The cost of a moderate lifestyle has risen by 12% over the past year, while the cost of a comfortable retirement has jumped 11%.

Samantha Gould, head of campaigns at the pension provider NOW: Pensions, said the figures reveal the UK’s “cost of retirement crisis” was “growing bigger by the day”. 

She added: “The people most exposed to financial struggles in retirement are now having to bear the brunt of soaring food and energy bills. The numbers simply don’t stack up to anything like an acceptable outlook for our ageing population.”

According to Myron Jobson, senior personal finance analyst at the investment platform interactive investor, many people have no idea how much income they need in retirement, so the PLSA’s figures will “serve as a wake-up call to savers to put more into their pension and to target a higher income in retirement.”

We look at how the living standards are created, what sort of pension pot you’ll need to achieve a decent retirement, and tips on how to boost your pension savings.

What do the retirement living standards mean?

The retirement living standards are created by the Centre for Research in Social Policy at  Loughborough University. They regularly check three baskets of goods and services (minimum, moderate and comfortable), covering items like household bills, food and drink, transport and holidays and leisure. 

The latest increases to the trio of lifestyles are the largest since the standards were launched in 2019.

The annual cost of a minimum lifestyle in retirement is now £12,800 (£19,900 for a couple), £23,300 for a moderate lifestyle (£34,000), and £37,300 for a comfortable retirement (£54,500).

A comfortable lifestyle includes three weeks’ holiday in Europe every year, money for home improvements (such as replacing the kitchen or bathroom every 10 years), and an annual clothing budget of up to £1,500.

Bear in mind that the living standards do not include any housing costs, so if you think you’ll still be paying off your mortgage, or paying rent, you’ll need to add that on top. The standards are also based on UK costs, excluding London - so if you live in the capital, your costs will be higher and you’ll need a bigger income to achieve the same lifestyle.

How much do I need to save to achieve these living standards?

The upcoming big rise in the state pension means that most people will be able to achieve at least a minimum living standard, and won’t require any additional savings.

The state pension will rise by a record 10.1% in April, meaning a full state pension will increase to £10,600.20 a year (for those retiring since 2016 and with at least 35 years of National Insurance contributions).

However, to reach the moderate or comfortable standards, savers will need other sources of income, such as workplace and/or personal pensions.

According to the PLSA, a single person would need a pension pot of £248,000 to achieve a moderate lifestyle, or £530,000 to enjoy a comfortable retirement. This is based on using the pension pot to buy an annuity, an insurance policy that pays a guaranteed income for life.

If you’re in a couple, each person would need a pension pot worth £121,000 (for the moderate lifestyle) or £328,000 (comfortable).

Annuity rates are currently at a 14-year high, meaning pension savers can get a decent income in exchange for their pension pot. If annuity rates were to fall, savers would need a bigger pot to achieve the same income.

Keeping your pension pot invested

If you don’t want to buy an annuity and would prefer to keep your pension invested, analysis by the investment platform AJ Bell shows that you’d need an even larger pension fund.

For a minimum standard of living, a single person would need a pension worth 

£52,000, for a moderate standard of living they would need £354,000, while for a comfortable standard they would need a whopping £755,000. This assumes the saver withdraws the 25% tax-free cash as a lump sum, and uses the remainder to generate an income to pay for their lifestyle.

Tom Selby, head of retirement policy at AJ Bell, comments: “While these numbers might sound humongous, the key is to start early and save often, making the most of employer contributions, tax relief and tax-free growth over decades.”

How much do I need to save each month?

According to interactive investor, building a pension pot worth £328,000 (targeting a comfortable lifestyle as part of a couple) could be done by saving just over £100 a month.

In total, £215 would be paid into the pension, but this includes £27 of tax relief and an employer’s contribution of £81, meaning the employee would contribute just £107.

However, the caveat here is that this assumes annual investment growth of 5%, and more importantly, that the money is saved every month for 40 years.

For those starting to save in their 30s or 40s, a larger amount will need to be saved.

Tips on boosting your pension

There are several ways to boost your pension and target a higher income in retirement.

First, look at your state pension. By checking your state pension, you can find out how much state pension you have accrued, and how much you are forecast to receive when you retire.

You should also check when you’re due to receive your state pension - although note this may not be accurate as your state pension age could rise in future.

If there are gaps in your state pension record - you’ll need 35 years of National Insurance contributions to be eligible for the full payout - you can pay voluntary “Class 3” contributions, also known as National Insurance credits, to plug the gap and boost your state pension. We explain how it works in State pensions: Deadline to buy National Insurance credits looming.

If you’re already receiving your state pension, check you’re actually getting the correct amount from the government. Thousands of pensioners have been underpaid, especially women. We explain more in our guide on state pension errors

What about my workplace pension?

Most employees save into a workplace pension, due to the government’s auto-enrolment initiative. 

Some workers may not be though, perhaps because they work part-time and don’t earn enough. If you’re not in a workplace pension scheme, ask your boss or HR team if you can be manually added. You’ll benefit from tax relief on your pension contributions, plus money from your employer, meaning that paying in just a small amount each month could become a decent nest egg in later life.

If you have some spare cash, check if increasing your pension contribution will trigger a higher contribution from your employer. Some firms will pay more in the more you pay in, up to a certain limit. This is free money that you could be leaving on the table otherwise (a bit like a pay rise, just delayed until you retire), so it’s worth asking.

Other ways to increase your pension income

If you’re self-employed, you need to set up your own pension. You won’t receive an employer contribution, but you will get tax relief. The earlier you start saving, the more you’ll benefit from the wonders of compounding, which can really turbo-charge a nest egg.

For those approaching retirement who are worried about a lack of savings, one option is to work longer perhaps part-time, or to do some ad-hoc freelance work.

By generating extra income from work, you may find you can live comfortably on your state pension plus your work pay, and leave any workplace or private pensions until later in your retirement when you finally give up work. 

If you’re feeling overwhelmed by retirement planning, consider seeking expert financial advice. Your employer may also offer free financial coaching, which can help you clarify your priorities and goals.

Jonathan Watts-Lay, director at wealth at work, a financial wellbeing and retirement specialist, comments: “The rising cost of living is understandably concerning, especially for those who are due to retire soon. We spend many years saving for our retirement so it’s important people receive support to be able to make informed choices about their retirement plans, and to help them think about if retirement is really achievable for them right now.”

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