How to achieve a secure retirement, as more retirees admit to struggling with debt

Cost-of-living pressures have eroded pensioner incomes in recent years, and more retirees are turning to unsecured debt to make ends meet.

More than a quarter (26%) of people over the age of 66 now have unsecured debt, according to a survey from investment platform Interactive Investor. This is a sharp increase from 19% two years ago.

The average debt among this group is £1,750, but more than a fifth (23%) of indebted pensioners owe more than £5,000.

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“The trend of rising unsecured debt, particularly among older people, paints a rather concerning picture, especially since it’s become more expensive to borrow money in the past few years,” said Craig Rickman, personal finance editor at Interactive Investor.

“But the unfortunate reality is that for some, taking on more debt is the only way to make ends meet against the tidal wave of higher costs.”

Another challenge is that many underestimate how much retirement will cost. Interactive Investor found that 42% of savers don’t know how much you need for a comfortable retirement, and 34% don’t know how much they are likely to have saved by the time they get there.

Even those with a plan may have been thrown off course in recent years given the volatile economic backdrop.

One survey respondent said: “I took early retirement at 56 with a final salary pension, but the cost-of-living crisis meant I had to find a part-time job and will now have to carry on working until I’m due my state pension.”

How much does retirement cost?

The cost of retirement depends on your lifestyle. Those who are happy with a no-frills retirement will be able to get by on significantly less.

According to trade association Pensions UK, formerly the Pensions and Lifetime Savings Association (PLSA), a basic retirement costs a single person £13,400 per year, while a couple can manage on £21,600.

As the name would suggest, a basic retirement includes few luxuries. It does not account for the cost of running a car, for example.

A moderate retirement costs £31,700 for a single person, and £43,900 for a couple, and includes a little more flexibility. For example, as well as running a car, you can holiday abroad in a three-star resort once a year.

A comfortable retirement costs £43,900 per year for a single person, and £60,600 for a couple. As well as a foreign holiday, this should stretch to several UK mini-breaks. The budget for outgoings like groceries and birthday gifts is larger too.

It is worth pointing out that none of these figures include housing costs. If you are still renting or paying a mortgage in retirement, that will add thousands to your yearly outgoings.

How big a pension do you need?

Understanding your annual outgoings is one thing, but how big a pension pot do you need to generate this sort of income?

If you live with a partner and own your own home without a mortgage, the state pension could be enough to cover your basic retirement costs, based on Pension UK’s figures. You would both need to qualify for the full new state pension, which is currently just under £12,000 per year.

This is not the ideal approach though, as it leaves you vulnerable to changes in government policy. The value of the state pension is currently protected from inflation by the triple lock guarantee, but that could come under threat in future Parliaments, given the high cost. Younger generations are also fearful that the state pension won’t be around forever.

Those hoping for a moderate retirement will need to supplement their state pension with private pension income. If you are in a couple, each of you will need a pension pot worth £165-250k to purchase an annuity that gets you over the line, according to Pensions UK.

This rises to £300-460k each for people who live with a partner and want to achieve a comfortable retirement.

Living alone means you cannot split costs, so single pensioners will need larger pension pots.

^{Source: Pensions UK}

How to boost your chances of a secure retirement

There are several steps you can take to boost your retirement prospects, from increasing your workplace pension contributions to filling gaps in your state pension record. We share some tips.

1. Start young

When you first enter the workplace, retirement can feel like a long way off and juggling conflicting financial priorities can be challenging. However, time is on your side and you have decades to benefit from the power of compound returns. Don’t waste this opportunity.

Because of the way compounding works, missing two years of pension contributions from age 30 could leave a typical worker with £31,000 less in their pension by the time they turn 66, according to research from consultancy Barnett Waddingham.

A similar gap at age 50 would leave you with £21,000 less.

2. Increase your workplace pension contributions

One of the best ways to boost your pension is to increase your contributions above the standard 8%. Most employees contribute 5% of their salary, while employers contribute a minimum of 3%.

Analysis from Standard Life recently found that boosting your monthly contributions by just 2% could result in £52,000 more in retirement.

This assumes you start working at 22 on a salary of £25,000, and achieve annual wage growth of 3.5%. It also assumes annual investment growth of 5%, inflation of 2%, and management fees of 0.75%.

If you increase your contributions, some employers will match them up to a certain point. Pension contributions also qualify for tax relief, making this a highly-efficient way to save.

3. Consider boosting your state pension

You need 35 years of National Insurance contributions (NICs) to qualify for the full new state pension. If you aren’t on track to achieve this, you may want to look at filling gaps in your record.

Note that you might be able to get free credits for certain activities, such as taking time out of work to care for a child under the age of 12.

You can check your state pension forecast using the government website.

If you want to boost your state pension entitlement, you can look at paying voluntary NICs for years when you weren’t working or earning enough to meet the threshold.

Buying one year’s worth of credits entitles you to 1/35th more of the full state pension amount – currently equivalent to £342 extra per year. Based on current rates, that means you should make your money back within three years of receiving your state pension.

4. Check what fees you are paying

Fees on workplace pensions are currently capped at 0.75% if you are in a default fund, but older funds could have higher charges, so it is important to check what you are paying.

Shopping around for a fund with lower charges could help you prevent your returns from being eroded over time – but remember to balance pension fees against other considerations like investment performance and customer service.

5. Consider your investment mix

If you are in your default workplace fund, check how it is invested. Generally speaking, younger savers should be taking on more risk than their older counterparts, as they have a longer investment horizon ahead of them to smooth out volatility.

This means they should have a higher weighting to more volatile investments like global equities, which have a higher return potential than assets like bonds or cash.

As you approach retirement age, that is the time to gradually start de-risking.

6. Aim to reduce your liabilities as you approach retirement

It is not possible for everyone, but reducing liabilities as you approach retirement should boost your chances of financial stability.

For example, the cost of renting for 20 years in retirement comes to a whopping £391,000, according to financial services company Standard Life. In London, this figure rises to £833,000.

Mortgage repayments can quickly erode your retirement income too. This could become more of a problem for future generations given the greater uptake of ultra-long mortgages in recent years.

The advice varies enormously depending on your circumstances, but some people choose to overpay their mortgage each month while they are still working. This could help you clear the debt before you retire. Just make sure you don’t trigger an early repayment charge.

Alternatively, if you are a younger saver (under 40) who is hoping to leave rented accommodation behind, see whether a Lifetime ISA could help you get onto the housing ladder by giving you a 25% government bonus on top of your savings.