Retirement costs rise
Retirement costs rise as inflation takes a bite from our pensions
Inflation takes a nibble
A cost-of-living crisis has emerged as inflation bites hard into the things we really can’t avoid buying, for example energy and food, where price rises have been eye-watering. In the latest figures for March, whilst appearing to be past its peak, inflation remains painfully high at 10.1%.1 Its impact is being felt widely across society, and the quality of our golden years is one area that seems to be suffering.
According to pensions trade body, the Pensions and Lifetime Savings Association (PLSA), for those wanting to enjoy a very basic standard of living in retirement, costs are 18%2 higher than they were a year ago.
Price rises are putting pressure on our retirements in two fundamental ways. Those saving for retirement will need a bigger pot, meaning squirrelling away more each month or saving for longer. While those in retirement will need to increase withdrawals, meaning facing the prospect of running out and having to rely on the state pension for the remainder of their days.
We can see this pressure in surveys. According to AJ Bell, an online brokerage, upon retiring one in ten people will now work part time as a result of the economic gloom, and a further one in ten will retire later than originally planned.3
So, for those thinking about retirement saving, it’s blurring an already opaque financial goal: the size of the pot we need to build for the lifestyle we want to live. Fortunately, the PLSA has attempted to provide some clarity, by defining three different potential standards of retirement living.
SEEKING THE GOLDEN YEARS WE DREAM OF
Research shows that just over three quarters of us (77%)4, don’t know how much we need in retirement. As with any loosely defined goal in life, it causes us to focus on the present at the expense of the future.
The Pension and Lifetime Savings Association (PLSA), a trade body representing £1.3 trillion in UK pension schemes, has painted a picture to help us plan for retirement – detailing three different standards of living with a breakdown of the costs involved, including rises year on year on account of inflation. Of course, personal financial circumstances vary wildly, and these must be taken as a rough guide.
For a single person, the PLSA forecasts that you will need £12,800 a year to enjoy a ‘minimum’ standard of living in retirement (up 18% from last year), £23,300 a year for a ‘moderate’ standard of living (up 12%), and £37,300 a year for a ‘comfortable’ standard of living (up 11%). Below offers a picture of some of the things these standards will afford. Bear in mind these figures are different for a couple – go to the PLSA’s Retirement Living Standards website for more details.
Meeting the standards
So how do we go about paying for these annual costs? As a base, there is the state pension. If you have 35 qualifying years on your National Insurance record, you are entitled to the full state pension, which for the tax year 2023/24 is £10,600 per year. For those with between ten and 35 qualifying years, you will receive a percentage of this.
This leaves it to us to make up the rest with our own private pot. AJ Bell has run some numbers to help us imagine the extra required. For those wanting a minimum standard, you’ll need a pot of £52,000, for a moderate standard it’s £354,000, and for a comfortable standard, you’ll need a fairly hefty three quarters of a million, at £755,000.5
It means that to be comfortable, the savings goal is a fairly significant stretch. To put this in context, for those earning the UK’s average salary of £33,0006 and auto-enrolled into a company pension scheme contributing the minimum 8% of their salary, they would be unlikely to afford even a moderate lifestyle. Therefore, we need to make sure we’re making the most of our pension savings.
Below are some tips for boosting your pension pot.
1. Start as soon as possible – a long runway of growth and compounding does wonders for the size of your pot. It gives you an incentive to comb through your bills, cut anything you don’t need, and divert as much as you can to your pension, so that it’s not wasted. be comfortable, the savings goal is a fairly significant stretch. To put this in context, for those earning the UK’s average salary of £33,0006 and auto-enrolled into a company pension scheme contributing the minimum 8% of their salary, they would be unlikely to afford even a moderate lifestyle. Therefore, we need to make sure we’re making the most of our pension savings.
2. Use workplace pension schemes to add employer contributions to your own, which is a minimum of 3% by law. Some employers may be even more generous, or potentially match any additional voluntary contributions (AVCs) you may make.
3. Boost your pot with any extras you might receive, for example bonuses or inheritance. Remember, you can contribute a maximum of £60,000 a year into your pension (raised this tax year from £40,000), or 100% of your salary, whichever is lower, and you may carry forward any unused allowances from up to the three previous tax years.
4. Use private pension tax wrappers such as self-invested personal pensions (SIPPs) if you’re self-employed or wanting to contribute outside your workplace pension. These come with tax relief and breaks to boost your pension savings.
5. Get the most out of your state pension and fill in any gaps in your National Insurance record, which you may do for up to the past six years.
Alliance Trust as a core holding
With more than £3 billion in assets, Alliance Trust is designed as a core holding for every generation of investor, seeking to provide both growth of your capital and rising income. It aims to provide real, long-term returns, and has increased its dividend every year for 56 consecutive years.
Marcus de Silva, Freelance Investment Writer.
1. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/march2023
2. https://www.retirementlivingstandards.org.uk
3. AJ Bell, as at 05/01/23
4. https://www.retirementlivingstandards.org.uk/details
5. AJ Bell, as at 11/01/23
6. Office for National Statistics, as at 01/10/22
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