In our heart of hearts, most of us know that we need to be saving more for our retirement. But two recent reports have very much shone a spotlight on just how big the potential shortfall is for many people who aspire to a comfortable retirement.
Every year a very useful survey is published by the Pensions and Lifetime Savings Association and the Centre for Research in Social Policy at Loughborough University. This study’s set of ‘retirement living standards’ has become something of an industry benchmark for how much people need to live during their older years.
The study identifies three different levels of retirement:
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A ‘minimum standard’, which covers basic food requirements, a modest allowance for clothes and footwear, and one short break in the UK. In other words, enough to survive on, but hardly aspirational.
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A ‘moderate retirement’ standard, which allows for a slightly more indulgent food and drink budget, a second-hand car which is replaced only every ten years, a two-week holiday in Europe every year and a more generous clothing budget.
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A ‘comfortable retirement’ standard, which as the name suggests gives our pensioner more of the high life, including three weeks’ overseas holiday a year, a newer and more frequently changed car, theatre trips, and a pretty smart wardrobe.
These are notional standards, but they are useful for illustrating what we might aspire to, and especially for comparing how much we need to save for each level of retirement from year to year.
The shock news is that this year those figures have risen dramatically. Just to achieve the minimum standard now requires £14,400 a year for an individual or £22,400 for a couple according to the study, an increase of more than 12% on last year. That means that even with the uplift coming in April, an individual on the full basic state pension of £11,500 will be almost £3,000 short of the income required even for a minimum standard of retirement living.
A moderate lifestyle in retirement now requires £31,300 a year for an individual or £43,100 for a couple (up a shocking 26% on 2023), while that aspirational comfortable lifestyle will cost £43,100 for an individual or £59,000 for a couple.
These figures assume that you have paid off your mortgage and have no housing costs; if you live in London, they are higher still. And if you aspire to help your grandchildren with their education costs or to get onto the property ladder, for example, you will need still more in your pension pot.
The massive increase in these figures this year is a reflection of high inflation, especially in necessities such as food and energy costs. And with that hike in required income has come a big rise in the amount you need to save to achieve those levels of income.
For example, even if they are eligible for the full state pension, an individual will still need as much as £790,000 in pension savings to get to that comfortable retirement level – and that is if they work until they are 67.
The researchers estimate that only about 20% of people currently in work are on track to reach even the moderate level of retirement income, and just one in 12 will achieve the comfortable level, based on their current level of pension saving.
I often speak to people who believe they ‘will be OK’ in retirement, without having really thought too deeply about what level of income – and hence pension savings - they will need to live the life they want to after they have finished with the world of work. This striking study will hopefully focus all of our minds on ensuring we are saving enough to have more than the frugal minimum in later life.
Meanwhile, a second report published this month suggests that the UK state pension age might need to rise to 71 as soon as 2040 to maintain the current ratio between active working people and retirees.
Although there is no indication that this is likely to become government policy, it should once again make us realise that those in work today – and especially those born after around 1970 – may not be able to rely on state provision to give them even a basic standard of living in retirement, especially if they don’t want to work into their 70s.
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