Key Takeaways
- The cost of minimum, moderate, and comfortable retirements has risen steeply in the last five years.
- A “moderate” standard of retirement living will now cost an individual £32,700 a year.
- Pensions remain a tax efficient way of saving for later life, experts say, but the rules have changed significantly in recent years.
At a time of rising living costs and economic uncertainty, British workers planning for their retirement have fresh worries. A new report says they face a “cliff edge drop in income” when they stop working, putting even a moderate quality of life out of reach for many.
According to pensions and savings industry trade body Pensions UK, a “moderate” standard of retirement living will now cost an individual £32,700 a year, 63% higher than in 2019, thanks to a sharp uptick in inflation over recent years. That’s around £20,000 higher than the current state pension.
The majority of savers aren’t putting nearly enough money aside to enjoy even that: Most people can achieve the “minimum” standard of living, but less than a quarter will be able to achieve a “moderate” one.
This gap between the state pension and amounts needed for moderate and comfortable retirements suggest a reliance on private pensions, whether defined benefit or defined contribution, property income or other sources of funding such as inheritance, property sales or savings. While living costs are higher for couples, many expenses are shared, and couples are more likely to have multiple sources of income.
UK Retirement Costs Have Surged
There are significant changes to the original benchmarks outlined when Pensions UK first launched its Retirement Living Standards Report in 2019. At the time, it put the “minimum” requirement at £15,000 for couples, with a “moderate” lifestyle costing £30,000 for two people, and a “comfortable” retirement costing £45,000 a year. Now the picture is very different.
- A “minimum” lifestyle: no overseas holidays, no car, and eating out once a month. Cost: £13,900 a year for one person, £22,500 for a couple.
- A “moderate” lifestyle allows overseas holidays and cars, as well as higher grocery, clothing and entertainment spending. Cost: £32,700 a year, £45,400 for a couple.
- A “comfortable” retirement allows all of the above, plus more domestic holidays and more to spend on food and social activities. Cost: £45,400 a year, £62,700 for a couple.
Though the report expects around 82% of working couples to reach the new “minimum” standard of £22,500, only 23% of current workers are thought to be saving enough to achieve even the “moderate” standard.
The findings are out of step with what some people will expect for their retirements, it adds, warning that, without higher levels of retirement saving, “there is a risk that many will face a significant drop in income when they stop working.”
“Without action, too many risk facing a cliff-edge drop in income when they stop work,” says Zoe Alexander, executive director of policy and advocacy at Pensions UK.
How the UK Pensions Landscape Has Changed
As employers have closed final salary schemes to new members, a patchwork system of retirement savings has emerged—driven by product expansion in the form of ISAs, a slew of tax and policy changes like the “pension freedoms” in 2015 and auto-enrollment into defined contribution workplace schemes. House price inflation in the last 10 years means residential property plays a much more central role in retirees’ planning. Savers have lots more choice, and shoulder much more of the risk.
“Pension savings are ultimately there to pay us an income when the time comes to retire, but the shift from pension promises to pots can sometimes leave people scratching their head at how much they need to put away,” says Charlene Young, senior pensions and savings expert at AJ Bell.
“Pensions should still be viewed as an incredibly efficient way to save for retirement and these figures bring into sharp focus just how important it is that people take ownership of their savings,” says Jon Greer, head of retirement policy at Quilter.
From April next year, most unused pension funds, including death benefits, will fall within the scope of the UK’s inheritance tax (IHT) regime, which charges 40%. With the cash ISA allowance also reducing for under-65s from April next year, looking closely at the role played by different tax “wrappers” in retirement planning has never been more topical.
UK State Pension in Focus
Here, the state pension—itself the subject of long-running debate over the “triple lock” and whether the government can afford to keep paying it—could be the deciding factor whether savers enjoy Pensions UK’s “minimum” or “moderate” retirement standard.
According to the group, it’s theoretically possible to survive on the state pension without any private pension savings. If households on even the average income scale of around £36,700 per year were to attempt this, however, they would be in for a significant lifestyle and affordability shock.
“The state pension still forms a crucial foundation and goes a long way toward helping people achieve a minimum standard of living, however stepping up to a moderate or comfortable lifestyle requires significant pension savings,” says Quilter’s Greer.
How to Fix the Pension Shortfall?
The Pensions UK report follows a recent retirement survey by pension company Scottish Widows, which is owned by retail banking giant Lloyds Banking Group. The report reveals that more than 12 million people, or 31% of adults, will not be able to cover their basic needs in retirement, which it labels as “pension poverty.”
The only potential good news is that future retirees currently under 30 may have more time to plug the gap than older workers. Pensions UK and Scottish Widows both advocate a rise in default automatic enrollment pension contributions—which kick in at age 22—from 8% to 12%, a move that would slash pension poverty from 32% to 13%. The only caveat is that this dramatic improvement in retirement prospects is only possible for those at the start of their saving journey. And that leaves uncomfortable choices for those closer to retirement.
