New figures released by the Pensions and Lifetime Savings Association (PLSA) show that the amount we need to save for our retirement has shot up in the last year. Richard Collinson, CEO of online planning tool Retire Easy, runs the rule on the sums… and explains how to find out if you are on track.
It’s no surprise that rising food prices and energy bills are driving increases in the cost of living. What was, perhaps, rather more alarming was recent research showing the extent to which those in retirement are being adversely affected.
The PLSA sets three benchmarks for the standard of living we can expect in retirement, and the amounts required have shot up in all three.
For instance, the income required for the “minimum” Retirement Living Standard (RLS) increased in the last 12 months from £12,800 to £14,000 for a single person and £19,900 to £22,400 for a couple.
This standard allows a retiree a week’s holiday in the UK each year and leisure activities about twice a week, along with enough money to pay their bills.
The income needed for the “moderate” RLS shot up from £23,300 to £31,300 for a single person and from £34,000 to £41,000 for a couple. This level of income provides additional financial security, £60 a week for eating out, a week-long holiday in Europe and enough to run a small second-hand car.
The cost of being “comfortable”
To meet the “comfortable” standard set by the PLSA, a single person needed an income of between £43,100 – up from £37,300; and £59,000 for a couple (a rise from £54,500). This living standard enables retirees to enjoy additional luxuries including theatre trips and a two-week holiday in Europe per year.
So how can we ensure a dignified and comfortable retirement?
The challenge, says the PLSA, is to ensure that people save enough money during their working life in order to achieve the standards they are looking for, and that the increases to the cost of living in retirement had highlighted what they called the “urgent need” for reform of the workplace savings system. One of these would be to implement an increase to minimum auto-enrolment (AE) contributions from 8% to 12% over the course of the next decade.
PLSA director of policy and advocacy Nigel Peaple said: “It’s important for workers saving for retirement to remember the standards are not prescriptive targets, they are a tool to help you plan. Working and saving is likely to vary over a lifetime, for example taking time off to have children, so it is important to adapt workplace pension contributions to make up for periods not saving.”
“Wake-up call”
Steve Webb, former Pensions Minister and now a Partner at Lane Clark & Peacock, described the newly updated figures as a “wake-up call” for the both the government and the pensions industry.
He continued: “Despite a significant increase in the state pension last April, the state pension rate is actually further away from providing a decent minimum standard of living now than it was a year ago. Meanwhile the cost of a moderate lifestyle in retirement has surged by nearly one third.
“Yet at the same time, the government is still dithering about whether and when to implement a set of modest increases to the amount being saved into pensions under the AE rules. Without urgent action, we are likely to see more and more people facing an unenviable choice between an extended working life or a poor retirement.”
How much do you need to save to reach your target retirement standard?
On top of your state pension (assuming it is the maximum available), you would need the following to achieve your target, according to the PLSA.
If a single person buys an annuity when they stop work, they would need to have saved £40,000 to £70,000 to reach the minimum standard, £300,000 to £500,000 for a moderate standard, or £490,000 to £790,000 for a comfortable standard.
Many people now drawdown a pension from their invested pot. Under the drawdown pension option according to investment platform AJ Bell, a single person requires savings of £70,000 for the minimum standard, £490,000 for a moderate standard and £790,000 for a comfortable level.
Are YOU on target?
If you want to make sure that YOUR personal plans to retire are on track, simply log on to RetireEasy LifePlan and update it with your latest data. A subscription costs just a few pounds a month and you can unsubscribe if you feel the program is not for you. You can see immediately just how much you can spend in retirement without eating into your savings. You can then run different scenarios to see how (for instance) your plans would be affected if you were to retire later, receive an inheritance or downsize.
