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£8k jump in pension income needed as living costs rise

Three older people enjoying afternoon tea

The annual cost of having a moderate standard of living in retirement now costs £8,000 more than just a year ago, due to higher living costs and changes in people's expectations.

Pensions industry body the Pensions and Lifetime Savings Association (PLSA) said that a single person in retirement needs £31,300 a year in 2024, up from £23,300 in 2023.

This increase reflects the price rises that households have faced, particularly in food and energy use. It also takes account of how people's priorities have changed following the pandemic, with greater importance placed on spending time with family and friends out of the home and helping family members financially.

Minimum, moderate and comfortable living standards

Calculated by the Centre for Research in Social Policy at Loughborough University on behalf of the PLSA, the Retirement Living Standards cover three different levels: minimum, moderate and comfortable.

The minimum level incorporates what members of the public think is required to cover a retiree's needs, not just to survive but to live with dignity -- including social and cultural participation. It includes grocery shopping, a week's holiday in the UK, eating out about once a month and some affordable leisure activities about twice a week. It does not cover the cost of running a car.

At the moderate level, retirees would be able to spend more on groceries and eating out, run a small second-hand car, and have a week's holiday in Europe and a long weekend break in the UK. At the comfortable level retirees would also have the budget for luxuries like regular beauty treatments, theatre trips and longer holidays.

Costs increased across all levels in this year's estimates, with a single person now requiring £14,400 a year for a minimum income, £31,300 at the moderate level and £43,100 a year for a comfortable living standard.

Couples required a joint £22,400 at the minimum level, £43,100 at a moderate level and £59,000 for a comfortable retirement.

"It's important for workers saving for retirement to remember the standards are not prescriptive targets, they are a tool to help you engage with the type of spending you think you will do in retirement and to help you plan for it," explained Nigel Peaple, director of policy and advocacy at the PLSA.

How people are changing their approach to retirement savings

The challenging economic climate has led to widespread changes in consumer behaviour regarding retirement, including working for longer, according to a survey of financial advisers by NextWealth for Aegon UK.

Over half of the 200 advisers surveyed reported that some or the majority of their retirement clients had made the following changes:

  • Stayed in work longer and/or deferred access to retirement savings (68%)
  • Withdrawing more from their overall savings (61%) -- although only 4% said this was the majority of their clients
  • Reviewing the amount and/or timing of passing wealth to the next generation (59%)
  • Wanted to decrease their level of investment risk (53%) -- although 36% noted they had seen clients increasing their investment risk
  • Looking to guarantee some income through a combination of an annuity and drawdown (53%)

Delay can make 'big difference' to retirement income

With over two-thirds of advisers seeing clients working longer or deferring accessing their retirement savings, Steven Cameron, pensions director at Aegon UK, noted: "A delay of even a year or two can make a big difference to sustainable retirement income levels as a result of saving for extra years, having a longer period of investment growth and having fewer years of retirement to fund."

Cameron also highlighted that while over half of advisers have seen some clients reduce investment risk, more than a third have seen clients take the opposite course of action to increase investment risk, perhaps to seek higher returns.

He concluded: "Overall, the research paints a picture of many clients changing their behaviour around retirement, but in a wide variety of ways. This shows the important role advisers play in tailoring their advice to individual needs and preferences, particularly amongst those approaching or in retirement."

Posted by Fidelius on February 12th 2024

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