Research underlines the importance of a workplace pension to bridge the gap between the state pension and a comfortable retirement amid cost of living pressures.
The Pensions and Lifetime Savings Association’s Retirement Living Standards has today published its updated Retirement Living Standard, taking into account recent high inflation.
Commenting, Alice Guy, Personal Finance Editor, interactive investor, says: “The latest Retirement Living Standards reveal the increasing gap between the state pension and the income needs of poorer pensioners.
“The state pension is due to rise 10.1% this April, by £18.70 per week for a single person on the full pension and £37.40 for a couple.
“But the cost of living is rising much faster for poorer pensioners than the state pension. Single pensioners need £35.53 more per week than last year (a 17.8% increase) to achieve a basic living standard, with food costs soaring 23.4% and energy bills rising a staggering 134%. Poorer pensioners spend a bigger amount of their income on essentials and so are harder hit by soaring inflation.
“Single pensioners need at least £12,800 for a basic retirement, assuming they’ve paid off their mortgage, which means someone relying on the state pension alone would currently have a shortfall of £3,172 and £2,200 once the state pension rises in April.
“Meanwhile, pensioners couples need £59.03 per week than last year (a 19% increase) to reach a minimum living standard. Their food costs have soared 28% with energy costs climbing 127% since last year.
“It’s important to remember that the Retirement Living Standards don’t include housing costs, so the costs for some pensioners will be much higher. interactive investor’s 2022 Great British Retirement survey showed that 23% of retirees don’t own their own home outright so are still grappling with high rental and mortgage costs as well as rising food and energy bills.
“The research shows how much more the cost-of-living crisis is hitting poorer pensioners as basic essentials such as food and energy have soared more than non-essentials. More wealthy couples on a comfortable income are facing a 9.6% rise in their living costs, whereas poorer couples are coping with a 19% increase.
“The research highlights the importance of saving into a pension to bridge the gap between the state pension and a moderate or comfortable living standard. To achieve a comfortable retirement, a couple need to supplement the state pension with a private pension pot worth £328,000 each. This seems like a huge amount, but it’s important to remember how much regular amounts add up over time.
“Someone would need to save £215 per month for 40 years to achieve a pension pot worth £328,000 (assuming investment growth of 5%). If they invested through a workplace pension, this contribution would only cost them £107 per month after tax, as it would be topped up by tax relief of £27 and an employer’s contributions of £81.
“There is a huge need for education around the amount people need to be saving for a comfortable retirement. Ii’s 2022 Great British Retirement Survey showed that 80% of pensioner savers don’t have a target in mind for retirement. Investors also tend to over-estimate how much income they will achieve in retirement by an average of 30%, raising the risk that they are not saving enough.
“ii’s 2022 Great British Retirement Survey also showed that a significant number of people know worryingly little about pensions. Nearly one in four (24%) of the general population told us they know nothing about them. The proportion is even greater in lower-income households (32%) and higher for women (29%) than for men (18%).”
Myron Jobson, Senior Personal Finance Analyst, interactive investor, adds: “Many people don’t know how much income they need in retirement. Our Great British Retirement Survey 2022, involving a sample of over 10,000 savers, found that nearly one in four (24%) of the general population say they know nothing about pensions, and many overestimate their retirement income by an average of around 30%.
“The PSLA’s figures will serve as a wake-up call to many savers to put more into their pension and to target a higher income to live comfortably at retirement.
“There is a significant difference between the minimum and moderate levels of lifestyle at retirement. A single person outside London with a moderate retirement living standard would need 82% more (or £10,500) than the minimum level. To live comfortably at retirement, a single person outside London would need 60% more (or £14,000). It is a similar story for couples.
“Yet the cost-of-living crisis has scuppered savings plans for many savers, with spiralling energy and food costs eroding savers' buying and saving power. Our Great British Retirement Survey 2022 found that more than half (56%) of Britons aged under 66 have been forced to curtail or scrap saving for retirement entirely because of the cost-of-living squeeze on budgets.
“Thankfully, the basic income needs at retirement will mostly be met for savers eligible for the new full state pension, which will increase to £10,600 in the 2023-24 tax year – but that’s only for people who have retired since 2016 and have managed to rack up 35 years of National Insurance contributions.
“For the many who will receive a lower state pension, making up the difference could be a tough ask amid the biggest fall in living standards in generations. The research highlights the importance of workplace pensions to plug the gap between the state pension and a comfortable retirement. Automatic enrolment will continue to play a significant role to this end.”
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