More people are living to 100: here is what to do with your pension

Over the next 25 years, there will be a 200% increase in the number of people living until 100 in the UK, according to insurer Canada Life.

Worldwide, it says, 459 million people will be 80 years old or above by 2050 – almost triple that of 2021.

In the UK, meanwhile, the number of people aged 65 and above is expected to grow by almost 40% between 2023 and 2050. 

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“It is undeniable that we are living longer,” says the insurer, adding that this will have a profound effect on how people think about their pensions and fund their retirement. 

Lindsey Rix-Broom, the chief executive of Canada Life, says: “The prospect of a longer life should fill us with a sense of optimism. 

“But at the same time, we need to be realistic about how we approach improved longevity from both a financial and practical perspective, especially if it’s unexpected.”

According to further research from the insurer, while almost half of UK adults feel positive about the prospect of celebrating their centenary, three-quarters agreed that should they live to 100, they would worry about their quality of life.

Many have no idea of their retirement needs

The prospect of more people living to 100 is worrying as a large proportion of adults in the UK have no idea how much money they will need in retirement, research has found. This is likely to result in significant shortfalls when people come to retire.

According to a report from Scottish Widows, 38% of all adults in the UK and 21% of over-50s have not calculated or thought about the amount of income they will need in their old age.

Peter Glancy, head of pension policy at Scottish Widows, says: “Expectation versus reality when it comes to retirement income shows how vital it is to help people – especially those on the verge of retirement – build a clearer picture of what their own lives could look like when they stop working, and what they can do now to achieve the best outcomes.”

How much will you need in retirement?

The amount you will need to retire comfortably will depend on your own lifestyle and spending needs.

Research by the Pension and Lifetime Savings Association suggests the cost 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 includes spending around £130 per week on groceries and £80 a week per couple on meals. It also adds extra luxuries such as regular beauty treatments, theatre trips and a two-week holiday in Europe each year. 

To achieve a moderate retirement, you would need a pension 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. 

For a no frills type of retirement, you would still need a pension of £14,400 – up from £12,000. For a couple, this has jumped from £19,900 to £22,400.

This cost is 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. 

How much will you need to fund your retirement lifestyle?

The PLSA highlights that the annual new state pension – currently £10,600 and rising to £11,502 in April – will help fund much of the minimum standard but you will need a larger pension pot to purchase 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 £7,467 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.

How to boost your retirement savings to combat living longer

If you intend to live to 100 then you need to either start early or increase your contributions to your pension. 

It can be hard to find the extra cash to increase your 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. If you can, you might also want to retire later or work part-time to allow your pension savings to build.

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.