The thought of giving up work and enjoying your golden years in retirement may sound great but it is getting more expensive.
Data from the Pensions and Lifetime Savings Association (PLSA) shows the cost of a comfortable retirement has soared – meaning most people will need a much larger pension pot than originally anticipated.
The PLSA regularly puts out figures showing how much it costs to fund a minimum, moderate and comfortable level of retirement.
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Its latest findings, released in early 2024, show the cost of living crisis and high inflation have hit retirees, especially those looking to help their loved ones with responsibilities such as caring for grandchildren.
The PLSA said the increase reflects changes particularly in food prices and energy costs, but also changing priorities among pensioners.
It found that more people want to help family members, with focus groups suggesting being able to budget £1,000 to assist with grandchildren activities as well as £100 per month to take relatives for a meal.
The PLSA data shows a ‘moderate’ standard of living in retirement now costs a single person £8,000 or 34.3% more than it did in 2022/2023, while the level of funding needed for a minimum or comfortable retirement is also on the rise.
The amount needed depends if you are single or in a couple and while the increasing state pension and rising annuity rates may help, it could also mean having to save more for your retirement.
“The cost of living has put enormous pressure on household finances over the last year and, as the research shows, this is no different for retirees,” says Nigel Peaple, director of policy and advocacy, at the PLSA.
These figures may be more than a year old but give a useful indication of how much you need to retire and how much to put into your pension.
The latest figures for 2024/2025 haven’t been released yet but they will reflect a period when interest rates and inflation were still high, although both have fallen in recent months.
Plus, recent data shows homeowners are taking out mortgages for longer periods, which could mean more people paying off debts in retirement.
How much does a 'comfortable' retirement cost?
The amount you will need to retire comfortably will depend on your own lifestyle and spending needs.
The costs of enjoying the finer things in retirement has shot up from £37,300 to £43,100 for a single person and to £59,000 for a two-person household.
The cost of a comfortable retirement allows for spending of around £130 per week on groceries and £80 a week per couple on meals, as well as extra luxuries such as regular beauty treatments, theatre trips and two weeks holiday in Europe a year.
Interactive investor highlights that these figures are after paying tax, so you technically need to earn more to meet these standards.
How much does a 'moderate' retirement cost?
To achieve a moderate retirement, you would need a pension pot of around £23,300 to £31,300 for a single person and from £34,000 to £43,100 for a couple.
The cost of a moderate retirement is based on spending around £100 a week on groceries, £60 a week on eating out, running a small second-hand car, having a week holidaying in Europe and a long weekend break in the UK.
“With ongoing rising costs, older generations increasingly want to help out younger family members. Family ties run deep and after the bleak years of Covid, it's lovely to see families wanting to spend time together, with additional costs budgeted within a moderate retirement to take out grandchildren and treat family members to a regular meal out,” says Alice Guy, head of pension and savings at interactive investor.
“It’s important to remember that these figures don’t take account of any housing costs in retirement. Many of those currently in their thirties and forties will be renting once they reach retirement so could need a lot more in their pension to achieve a moderate standard of living in retirement.
Becky O'Connor, director of public affairs at PensionBee, adds that what is considered a minimum, moderate or comfortable living standard for retirees remains a mostly subjective judgment.
“The steep rise in the amount required to fund a moderate lifestyle is partly a reflection of higher living costs but also partly linked to rising expectations around this ‘average’ standard,” she says.
“Emerging priorities such as the ability to eat out more, enjoy more time out with loved ones and help out family members financially highlight the evolving expectations and desires of the future generation of retirees.
“While the PLSA suggests a new set of life priorities could be down to the experience of Covid, it could also simply be that the financial demands placed on retired people, including by adult children who are themselves struggling to afford a decent lifestyle, are higher than they have ever been."
How much does a 'basic' retirement cost?
For a no frills type of retirement, you would still need a pension pot of £14,400 – up from £12,000. For a couple, this has jumped from £19,900 to £22,400.
These costs are based on £95 for a couple’s weekly groceries, a week’s holiday in the UK, eating out about once a month and some affordable leisure activities about twice a week. It does not include the budget to run a car.
Annual expenditure | Single person | Couple |
|---|---|---|
Minimum retirement | £14,400 | £22,400 |
Moderate retirement | £31,300 | £41,300 |
Comfortable retirement | £43,100 | £59,000 |
How much will you need in your pension pot to fund your retirement lifestyle?
The PLSA highlights that the annual new state pension – currently £11,973 - will help fund much of the minimum standard but you will need a larger pension pot to buy an annuity or earn enough from drawdown for a moderate or comfortable retirement.
Analysis by Quilter for MoneyWeek suggests that a single person would need a pension pot worth £459,000 to get a moderate level of income from an annuity, rising to £738,000 for a comfortable retirement.
A couple would need £515,000 to purchase an annuity for a moderate lifestyle and £929,000 for a comfortable one.
This assumes an annuity rate of 5.34% for a single person and 4.79% for a couple.
The amount you need to put away in a pension to build a pot worth £738,000 will depend how far away you are from retirement.
If you have 40 years to save, then you would only need to put away £7,4677 per year, according to Quilter.
But that rises to £12,652 over 30 years and £23,830 over 20.
This assumes a 4% annual real return.
“What the figures continue to show is that it will take a concerted effort to achieve a pension pot required to meet the difference between the income level indicated by the standard and that provided from the full state pension,” says Jon Greer, head of retirement policy at Quilter.
“The earlier that savers understand the difference, then the easier it will be to plan how to achieve it – or achieve the target that’s personal to you. Unfortunately, no one is going to do it for you.”
AJ Bell estimates that to obtain these standards in drawdown, a single person would need a pension pot worth £490,000 for a moderate lifestyle or £790,000 for a comfortable one.
This rises to £515,000 for couples wanting a moderate lifestyle and £890,000 for those seeking a comfortable standard.
The figures are based on annual investment returns of 4% after charges, that income rises by 2% per year and the pot lasts for 25 years.
“Spikes in inflation have clearly made that task harder but there is no magic bullet when it comes to building a retirement pot that matches your goals and spending plans,” says Tom Selby, head of retirement policy at AJ Bell.
“The key is to save as much as you can from as early as possible, taking advantage of the upfront boost of pension tax relief, tax-free investment growth and, where available, employer contributions. While the fund sizes needed to achieve a moderate or comfortable standard of living might be intimidating, making a realistic budget and setting up a regular savings plan can make the task a lot less painful.”
How to boost your retirement savings
It can be hard to find the extra cash to increase pension contributions to ensure you meet the retirement living standards you desire, especially with other bills rising.
But gradually increasing how much you put into your pension could help boost your retirement fund.
Analysis by wellbeing platform WEALTH at work suggests someone in their 20s saving an extra 1% a year with their employer matching this, may be able to increase their pension pot in retirement by 25%.
For example, a 25-year-old basic rate taxpayer earning £40,000 per year could increase their contributions by 1% of salary, matched by their employer.
The cost to the employee of this increase is a reduction in take home pay of less than £23 per month or £272 per year but this would boost their pension pot at retirement by 25% from £198,683 to £248,353.
This assumes their salary increases by 2.5% each year, pension charges of 0.75% apply, investment growth is 5% each year and the pension value is adjusted for inflation at 2.5% each year.
“Small increases can have a significant impact on your pension savings, but small reductions in your pension savings can also make a huge dent," says Jonathan Watts-Lay, director, at WEALTH at work.
Don't forget about tax
Frozen tax thresholds mean pensioners are also more likely to be pushed into higher tax brackets due to fiscal drag.
Even the state pension alone at £11,973 per year would take you close to the £12,570 personal allowance tax threshold so any income above that would push a pensioner into paying the basic rate of tax.
Once you start taking income from your pension through either drawdown or an annuity, you also have to consider how this will hit your tax bill and manage withdrawals.
One popular method of accessing a pension pot is the 4% rule.
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