Earlier this month, the Pensions and Lifetime Savings Association (PLSA) published its latest Retirement Living Standards, an estimate of the amount of annual income single people and couples need to achieve three different standards of living in retirement: minimum, moderate and comfortable. The level of annual income needed to meet each living standard rose by 10 per cent or more between 2021 and 2022 due to rising inflation. And only the annual income of £19,600 required for a minimum lifestyle for a couple will be fully covered by the full new state pension, and after it rises to £10,600 a year from April.
So it's clear that it's necessary to invest for retirement. The figures will change from year to year, especially when inflation comes down, and might be different by the time you reach retirement. But even then, the state pension is only likely to cover the annual income required for a minimum lifestyle, and you may well aspire to more.
What is a 'minimum' standard of living in retirement?
The PLSA's minimum lifestyle includes £54 for a single person or £96 for a couple's weekly food, a week's holiday and a long weekend in the UK once a year, eating out about once a month, and affordable leisure activities about twice a week.
It does not include having a car, which might curtail your social and leisure activities – especially if you live in an area with poor public transport links. And as you get older you might be less inclinded to walk far or get yourself to stations and bus stops. You might also wish to holiday outside the UK.
A 'comfortable' standard of living in retirement
To have what the PLSA describes as a 'comfortable' lifestyle in retirement, a single person needs an income of £37,300 a year and a couple £54,500 a year. This, for example, enables a couple to spend £238 a week on food, including meals out, have two cars and replace them every five years, take three weeks holiday in Europe every year and go regularly to the theatre.
To get this level of income, the PLSA says that a couple sharing costs with each in receipt of the full new state pension would need a retirement pot of £328,000 each, based on an annuity rate of £6,200 per £100,000. But while annuity rates are currently fairly generous, they might not be when you come to retirement.
The PLSA's figures also exclude the costs of living in London, where you would need more. And they do not include the cost of housing. But research by investment platform Interactive Investor found that 23 per cent of retirees don't own their home outright and have to factor in mortgage or rental costs.
The PLSA's figures also don't take account of your personal ambitions in retirement. Will you, for example, need a lump sum for a big expense such as a world cruise, a holiday home or a boat, or might you want to help your children or grandchildren pay for university or buy homes?
We will look at how much you might need to have invested for retirement next week, but to give an idea, just to meet the PLSA income estimates, broker AJ Bell suggests that on top of receiving the full state pension, a single person could need a pension pot worth £52,000 to enjoy a minimum, £354,000 to enjoy a moderate or £755,000 to enjoy a comfortable standard of living in retirement.
Workplace pensions
Workplace pensions are a very important part of building up the funds to bridge the gap. But to meet your personal retirement objectives, you might need to save on top of your workplace pension, and if you are self-employed you need to provide for yourself. Self-invested personal pensions (Sipps) and individual savings accounts (Isas) are tax-efficient vehicles in which to supplement your workplace pension. Which one you should prioritise depends on a number of factors, which we regularly discuss in our financial planning articles and portfolio clinics.
The PLSA estimates also assume that you will receive the full state pension, so ensure that this will be the case, as it is a key way to cover a good chunk, if not all, of your basic spending.
