Pensioners now need to find £30,000 more than they did last year to maintain a comfortable standard of living in retirement. The rise has been caused by the cost of living continuing to climb ever higher over the past 12 months.
New pensions industry guidelines – which will be widely used by experts as a measure of how much money is needed in retirement – lay bare the true impact of inflation.
The calculations last year showed it cost £43,900 for a single pensioner to lead a ‘comfortable’ life. But that has since risen to £45,400 a year, when accounting for inflation, according to Pensions UK.
That means pensioners need an additional £1,500 a year – an extra £30,000 over a 20-year retirement. Before tax deductions, they would need £54,720 a year.
So, what kind of life are you on track for in retirement? Here Money Mail explains how much you need save in your pension to afford various standards of living, how much you’ll need to retire early – and what you can do to turbocharge your savings today.
How much do I need to save?
There are two main factors that determine how big your pot will need to be to see you through retirement – when you want to give up work and the kind of lifestyle you desire.
If you want to leave work at 55 and live comfortably, you’ll need to have a whopping pot set aside.
But someone who is frugal and happy to work until they are 70 will need a much smaller nest egg.
In fact, the difference in savings needed by these two retirees is a huge £800,376, according to calculations for Money Mail by wealth manager Evelyn Partners.
That is based on fresh figures released today by official body Pensions UK, which reveal how much a pensioner needs in post-tax income each year to afford a ‘minimum’, ‘moderate’ and ‘comfortable’ lifestyle.
A single pensioner now needs £32,700 a year to achieve a moderate lifestyle, while a couple would need a combined income of £45,400 a year. This is up from £31,700 and £43,900, respectively, last year.
The figures cover a fortnight in the Mediterranean every year and running costs for a three-year-old car, as well as a decent £59 weekly food shop.
Someone retiring at 65 needs a £335,217 pot to afford this lifestyle, analysis by Evelyn Partners shows.
This assumes they receive the full, new state pension – currently worth £12,547.60 a year – once they reach pension age (now rising from age 66 to 67).
Someone who presently receives the full state pension needs to draw an annual income of £20,152 from a workplace or private pot to achieve this ‘moderate’ lifestyle.
The Pension UK figures, from the Centre for Research in Social Policy at Loughborough University, consider all the costs most people incur during retirement – from food to home renovations.
They are designed to be a simple rule of thumb, rather than a perfect reflection of an individual’s needs.
They can be a useful starting point to think about your own habits – for example, you could increase the budget for holidays if you like to go on luxury breaks.
Mike Ambery, of pension provider Standard Life, says: ‘The figures can look high at first glance.
But when you start to factor in all the costs of later life, it quickly becomes clear how it can all add up. The figures are a useful guide, grouped into three broad standards of living and based on owning your own home.
‘But everyone’s lifestyle is different, so people can adapt the numbers to reflect how they expect to spend in retirement.’
Crisis: Some 15million Britons are not saving enough for retirement and more than four in ten working adults are not putting aside anything at all
What if I want to retire early?
Anyone planning to retire early will need to save up substantially more because state pension payments only begin at age 66, rising to 67 on a sliding scale each month until 2028.
For example, someone giving up work at age 55 will need to have saved £546,360 to achieve a moderate lifestyle throughout their later years.
This assumes costs and the state pension rise by 2.5 per cent a year, pension investments grow by 6 pc a year and that you live until the average life expectancy age of 81.
It also assumes the personal allowance and tax thresholds rise in line with 2.5 per cent inflation every year, and that the retiree receives 25 per cent of their private pension income each year free of tax.
If you can live on a small budget, then you don’t need to save up quite so much. A single pensioner needs a pension income of £13,900 a year to afford the most basic lifestyle in retirement.
This affords you £57 a week on groceries and a week-long holiday in the UK every year – but you must rely on a free bus pass rather than maintaining a car.
Someone retiring at 55 will need £152,140 saved, according to Evelyn Partners. Raise your pension age to 65 and you can cut your target savings to £44,874.
Those who want a comfortable lifestyle will need to have squirrelled away even more.
A single retiree needs an annual income of £45,400 after tax to afford this way of life, which includes two weeks in Europe every year and three long weekends in the UK.
It also includes a £78 weekly food shop and £1,500 spending money for clothing.
Someone retiring at 55 would need £816,091 saved, says Evelyn Partners. Those who increase their retirement age to 60 or 65 would need smaller pots of £685,950 and £532,020, respectively. These figures assume you do not pay rent or a mortgage.
A single pensioner now needs £32,700 a year to achieve a moderate lifestyle, while a couple would need a combined income of £45,400 a year
Are my savings in a good place?
You may notice pension payments being deducted from your salary on your pay slip every month, but it can be tricky to work out if you are setting enough aside.
The first step is to check the current size of your pension savings by logging in to your workplace pension accounts.
If you earn more than £10,000 a year and have an employer, there’s a good chance you are paying into a workplace pension.
Find out who your pension provider is and ask for a statement of how much you have accrued – or hunt down the latest statement it has sent to you.
Your provider might give you an estimate of the income your savings could provide in retirement, which you can use to compare against the latest retirement Living Standards, explains Marianna Hunt, of Fidelity International.
If you have many pots from previous jobs, track them down. If you think you have lost some savings, either contact your former employer or your pension scheme by using the Government’s Pension Tracing Service. See gov.uk/find-pension-contact-details.
Once you have the total, you can use an online pension calculator, such as one from the Government’s Money Helper service, to find out what this is likely to be worth by your target retirement age.
See moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics/pension-calculator. And don’t forget about the state pension, reminds Mike Ambery, of Standard Life.
If you have been in work most years since leaving education, it is more than likely that you will be eligible for the full state pension. But it is important to check you will have the at least 35 years of National Insurance contributions to qualify.
Can I boost my pot if I don’t have enough?
Almost one in five won’t be able to afford even the most basic standard of life in retirement, according to Pensions UK.
Just 23 per cent of people will lead a moderate lifestyle and 9 per cent will be able to afford a comfortable way of life.
Some 15million Britons are not saving enough for retirement and more than four in ten working adults are not putting aside anything at all, a Government report published last month warned.
But it is never too late to bump up your pension savings. Ms Hunt says: ‘The good news is increasing your pension contribution by just a little, or taking advantage of higher employer matching contributions can all help boost your retirement income.’
If you are auto-enrolled into a workplace pension, you will be paying at least 5 per cent of your salary into your pot monthly, while your employer will typically pay 3 per cent.
Check if your employer will match your monthly contribution if it is not already doing so, Mr Ambery advises.
And if you can afford to, increase the amount you pay in. Not only is this a tax-free way of saving, you may be able to save on National Insurance if your employer offers salary sacrifice.
Mr Ambery adds: ‘Think about boosting contributions through life changes like a promotion or pay rise.’
You could also consider delaying the date at which you start taking your state pension. Your weekly payout rises by 1 per cent for every nine weeks you defer, adding up to 5.8 per cent for every year you push it back.
- How much do you need to live on in retirement? Email l.evans@dailymail.co.uk
