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Couples now need an extra £9,100 a year to maintain a good standard of living in retirement, new figures show.
Rising prices have added nearly a third to the amount of money retirees need to maintain their current lifestyles.
Figures compiled by the Life Savings and Pensions Association estimate the cost of a basic, moderate and comfortable retirement for individuals and couples, excluding housing and after-tax costs.
The headline inflation rate has fallen to 4 percent in the 12 months to December, raising hopes that the cost of living crisis may be ending.
However, retired households have faced a much larger cost increase over the past year than other age groups.
The amount of income they need to live a “moderate” lifestyle has risen by 27 per cent as the things they normally spend on have seen the biggest price rises, a leading pensions association warns today. These include food, heating bills and travel expenses.
A “moderate” lifestyle now costs a retired couple £43,100 a year, up from £34,000 this time last year, according to pension industry guidelines.
A single person living alone would need £31,300 a year, up from £23,300 last year, to maintain this lifestyle.
This would allow them to spend a two-week holiday in Europe each year, a long break in the UK and £55 per person in a grocery store each week, according to the Pensions and Lifetime Savings Association (PLSA) report.
How much would different lifestyles cost you?
The figures exclude housing costs, assuming retirees own their home and have paid off their mortgage, and are after taxes.
Basic – £22,400 per couple
Moderate – £43,100 per couple
Comfortable – £59,000 per couple
Is your pension fund on track to pay it off?
The state pension will cover just over a third of the income needed for a moderate retirement of £31,300 for an individual, even after it rises by 8.5 per cent in April to £11,500. Only one in five new retirees has this amount, compared to one in three a year ago.
This means those who stop working in 2023 will need an extra £108,880 to equal the same pension they would have been able to afford at the start of last year, if they use the pension to buy a guaranteed income.
Calculations for Money Mail and This is Money by investment platform Interactive Investor found that a 65-year-old retiring today would need savings of £356,880 to afford an annual pre-tax income of £31,300, assuming they receive the pension complete state.
Couples seeking a “comfortable” retirement now need a combined income of £59,000 (up from £54,500); while a single person would need £43,100, an increase of £5,800.
This would allow them to enjoy a two-week holiday in a four-star hotel in Europe, three long weekends in the UK a year, £70 per person each week on food and replacing a car every five years.
A 65-year-old retiring today would need £574,155 in their pension pot on top of the state pension, Mrs Guy estimates. That means workers need to save an extra £44,155 compared to a year ago to be able to afford the same lifestyle.
To meet the minimum standard of living, you must have an income of £14,400 this year, £1,600 more than this time last year, according to the PLSA. A couple needs to be able to withdraw £22,400 each year to cover their basic needs.
Couples receiving the full state pension will be able to afford it when it rises to £11,500 in April, but those living alone will need to find another £2,900 a year from other savings and pensions.
Why are costs increasing?
The association’s ‘retirement living standards’ are widely used by the pensions industry as a measure of how much money people need in retirement to maintain their spending habits.
Rising food prices have been one of the biggest pressures on pension budgets over the past year, after food inflation hit a 45-year high of 19.2 per cent in March last year . Food prices have risen another 8 percent in the past year, official figures show.
Couples now need to spend £110 a week on groceries, up from £74 last year, costing an extra £36 a week. The lifestyle also allows you to spend £100 a month to treat other people, such as family members, to meals.
Pensioners are now spending more money supporting loved ones, while younger generations struggle to cope with rising costs, Loughborough University researchers calculated for the PLSA. This adds around £1,000 to the annual income they need in retirement.
The report says: “Research participants spoke of the increased current need (in the context of substantial pressures on the incomes of working households) to be able to step in and cover the cost of this element of social participation for family members such as as their adult children and grandchildren.’
Costs in the six biggest areas where retired couples tend to spend their money have risen, from household bills, food and drink and transport to holidays and leisure, clothing and social and cultural participation .
Alice Guy of Interactive Investor says: “The rising cost of living is hitting those at lower income levels, such as retirees, much harder because they spend more of their budget on essentials like food and heating.”
Household energy bills have risen by £1,265 a year for single households and £715 for couples over the past year, while the cost of clothing and footwear has almost doubled to £1,500 a year.
Nigel Peaple, policy director at the PLSA, says rising costs have put “enormous pressure” on pensioners’ family finances.
The state pension will be more valuable than ever thanks to its protection against inflation.
The state pension triple lock acts as a crucial safeguard against rising pension living costs, meaning the state pension increases by the higher of inflation, income growth or 2 .5 percent each year.
Mr Peaple says: “It is important for workers saving for retirement to remember that a couple where each is fully entitled to the state pension will meet the minimum level.” If he’s worried about not having enough money in retirement, he might consider delaying it or working part-time in his later years. This means you will have a higher annual income when you finally leave the workplace.
According to pension company Canada Life, if you stop paying into your pension at age 55, your final savings will be 59 per cent less on average than if you had continued saving until state pension age, which is currently 66.
If you’re not sure how much you’ll need in retirement and how to manage your money, use the government’s free Pension Wise service.
Book a free pension orientation appointment if you are over 55 years old at: moneyhelper.org.uk/en/pensions-and-retirement/pension-wise
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