The cost of a comfortable retirement has just shot up by £30,000, and millions of Britons are nowhere near on track to afford it.
New figures from PLSA’s Retirement Living Standards show that pensioners now need substantially more than they did even a year ago, thanks to the relentless rise in the cost of living. So, how much do you actually need to have squirrelled away by your target retirement age, and what can you do if your savings are looking worryingly thin? Here’s the honest breakdown.
There are three distinct levels of retirement lifestyle.
Industry experts have grouped retirement into three broad standards of living, which gives you a useful starting point when working out what you need. A minimum lifestyle covers the essentials, with around £57 a week on food shopping, a week-long UK holiday each year, and the assumption you’ll use a bus pass rather than running a car. A single pensioner needs around £13,900 a year after tax to manage this kind of life.
A moderate lifestyle is more comfortable, with around £59 a week on food, a fortnight in the Mediterranean every year and the running costs of a three-year-old car factored in. This costs a single pensioner around £32,700 a year, or £45,400 for a couple. A comfortable lifestyle bumps it up again, with two weeks in Europe each year, three long weekends in the UK, a £78 weekly food shop and £1,500 for clothes. That costs a single retiree around £45,400 a year after tax.
How much do you actually need to save?
These yearly figures translate into surprisingly large pension pots once you do the maths. To retire at 65 and afford a moderate lifestyle, a single retiree needs to have built up around £335,000 in pension savings, on top of the full state pension. That assumes you’re getting the full state pension of around £12,500 a year, so you’d be drawing roughly £20,000 a year from your own pot to make up the difference.
For a comfortable lifestyle, the numbers climb fast. Someone retiring at 65 needs around £532,000 saved. Push your retirement age up to 60 and you’d need around £686,000. Bring it forward to 55, when there’s no state pension to lean on, and the figure jumps to a hefty £816,000. The earlier you want to give up work, the bigger the pot has to be, since you’ve got more years to fund yourself before the state pension kicks in.
Retiring early comes at a cost.
Retiring at 55 sounds dreamy until you see the savings target. Without any state pension for at least eleven years, you’ve got to fund the whole lifestyle yourself in the meantime. Even for a moderate lifestyle, retiring at 55 needs around £546,000 saved. For a comfortable life, that climbs above £800,000.
Compared with someone happy to keep working until 70, the difference is eye-watering. Late retirees can lean on their state pension straight away and only need to fund five fewer years. The total saving needed to retire at 70 versus 55 differs by around £800,000, which is the price you pay for those extra 15 years of freedom.
The reality is bleak for most Brits.
The trouble is, the figures most people will need are nowhere close to what they’ve actually saved. Recent estimates suggest just 23 per cent of British workers are on track for a moderate retirement, and only 9 per cent will achieve a comfortable one. Around one in five won’t even afford the most basic lifestyle.
The bigger picture is even grimmer. Around 15 million Britons aren’t saving enough for retirement, and more than four in ten working adults aren’t paying into a pension at all. Add in the rising cost of living, and you’ve got an entire generation heading towards retirement without the means to actually retire. The earlier you face up to your own numbers, the more time you have to do something about them.
How to check where you actually stand
The first step is taking stock of what you’ve already got. Log in to your workplace pension account and check the current balance. If you’ve changed jobs over the years, you might have several smaller pots scattered across different providers. Tracking them all down can be a faff, but the government’s free Pension Tracing Service makes it much easier to find any you’ve lost touch with.
Once you’ve added up your total, use an online pension calculator, such as the government’s Money Helper service, to project what your pot might be worth by your target retirement age. Compare that figure to the retirement lifestyle you’re aiming for. Don’t forget the state pension either, since for most people who’ve worked steadily, that adds around £12,500 a year on top. You’ll need at least 35 years of National Insurance contributions to qualify for the full amount.
It’s possible (and advisable) to give your pension a serious boost.
The good news is that even small changes can make a big difference, especially if you’ve got a decade or more left to go. If you’re auto-enrolled in a workplace pension, you’re typically paying in 5 per cent of your salary, with your employer adding 3 per cent. Many employers will match higher voluntary contributions up to a certain level, which is essentially free money you don’t want to leave on the table.
If you can afford to pay more in, do so. Pension contributions come with tax relief, which means every £80 you put in is topped up to £100 by the government, with higher-rate taxpayers able to claim further relief on top. If your employer offers salary sacrifice, you’ll also save on National Insurance. Any pay rises or bonuses are a brilliant opportunity to bump up your monthly contributions before you get used to the extra cash hitting your account.
Don’t overlook your state pension options.
Plenty of people forget that the state pension itself can be quietly boosted with a few clever moves. If you’ve got gaps in your National Insurance record, you may be able to fill them by paying voluntary contributions, which can be cost-effective if you’re a few years short of the 35 needed for the full amount. Check your record on the government website to see where you stand.
You can also delay starting your state pension once you reach pension age, with the weekly payout rising by around 1 per cent for every nine weeks you defer. Push it back by a full year, and you’ll get around 5.8 per cent more for life. For anyone who’s still working at state pension age or simply doesn’t need the money straight away, deferring can be a genuinely useful way to lock in a higher income later.
What kind of retirement you can actually have depends on a number of factors.
The honest takeaway from all of this is that the size of your retirement pot will determine almost everything about how you live in your later years. Holidays, food shopping, hobbies, running a car, helping out the grandkids, all of it depends on what you’ve put away. Doing nothing isn’t really an option, since the state pension alone won’t even cover the most basic lifestyle for most people.
The earlier you start saving, the easier the maths becomes, thanks to the magic of compound growth over decades. But even if you’re closer to retirement than you’d like to admit, increasing what you pay in, claiming the employer match, filling NI gaps and pushing back your retirement age can still make a real difference. Numbers as big as £500,000 or £800,000 can feel completely out of reach, but they’re built one monthly contribution at a time. The trick is starting somewhere, and starting now.
