Does your pension meet the new retirement savings estimates?

The amount of money you will need for retirement has ticked up for those aiming for comfortable or moderate lifestyles in later years, according to research by the Pensions and Lifetime Savings Association (PLSA).

A single retiree is now expected to need an income of £31,900 each year for a moderate lifestyle (a £400 increase on the previous estimate), and £43,900 each year for a comfortable lifestyle, an £800 increase. However, there is a silver lining for those planning a minimal lifestyle in retirement, where the cost per year has dropped by £1,000. Those with a minimum lifestyle are anticipated to spend about £13,400 per year.

Some of this retirement income may be compensated through the state pension, which pays up to £11,975 per year per person. If you are living a minimum lifestyle as a couple, the PLSA believes the full state pension will cover your retirement needs. However, for any other situation, such as wanting a more comfortable lifestyle or if you are single retiree, you will need your personal pension pot to cover some of the expenses.

For those wanting a comfortable lifestyle, the PLSA estimates a single person would need a pension pot of between £540,000 and £800,000 to purchase an adequate annuity, while a couple would need £300,000 to £490,000 in their pension pots each. A moderate lifestyle would require £330,000 to £490,000 for a single person, and £165,000 to £250,000 for each member of a couple.

How to prepare for the costs of retirement

The good news for retirees is that the pain of rocketing inflation is now easing, which in turn is reflected in the drop in the cost of a ‘minimum’ retirement living standard. While the ‘moderate’ and ‘comfortable’ living standards have seen marginal increases, these are significantly below the eye-watering rises we saw off the back of the cost-of-living crisis in the early 2020s.

This is clearly a positive development although the nature of inflation means living costs for everyone, including retirees, will almost certainly be permanently higher in the future. And there is no getting away from the fact that the pension pot sizes needed to achieve the moderate or comfortable living standards, particularly for a one-person household, are staggeringly high.

Being told you need to build a pension pot worth £500,000 plus to enjoy a decent standard of living in retirement might feel intimidating. The key is to focus on saving as much as you can afford from as early as possible, taking advantage of incentives like employer contributions, tax relief and tax-free investment growth.

Automatic enrolment has been successful in boosting pensions participation in the UK, but the harsh reality is that anyone on minimum contributions – currently set at 8% of earnings between £6,240 and £50,270 – is at risk of falling well short of their retirement expectations. The big danger here is that, without a scaling up of minimum contributions, millions of people will sleepwalk into a retirement shock and be forced to choose between working longer or living on less money in their later years.

What does a ‘comfortable’ versus

The Retirement Living Standards are designed to provide a very rough guide to how much a ‘minimum’, ‘moderate’ and ‘comfortable’ retirement lifestyle might cost. They attempt to give a realistic estimate by assuming that everyone, including those targeting a ‘minimum’ standard of living, will want to enjoy a social life and the odd takeaway as well as paying essential bills.

For example, the minimum living standard assumes one weeklong UK holiday per year. By contrast, the moderate living standard assumes a fortnight three-star all-inclusive holiday in the Mediterranean and a long weekend break in the UK. The comfortable living standard, meanwhile, budgets for a fortnight four-star holiday in the Mediterranean with spending money and three long weekend breaks in the UK.

You can see some of the key spending assumptions that inform the Retirement Living Standards in the table below. It’s important to note that all the living standards assume no rental or mortgage costs.