Rising prices add almost 20% to “minimum” cost of retirement

Retirees trying to achieve a basic standard of living have seen the minimum cost of retirement soar due to high inflation. We outline tips to boost your pension and how to prepare for retirement.

Senior couple walking on a beach together
(Image credit: Getty images)

Retirees aiming to achieve a basic standard of living will have seen the minimum cost of retirement soar by almost 20% over the past year, due to big rises in the cost of food and energy.

To achieve a “minimum” retirement, pensioners now need an annual income of £12,800, up from £10,900 a year ago - an 18% increase. For a couple, a combined income of £19,900 is needed, up 19% from £16,700.

This basic retirement is one of three “retirement living standards”, promoted by the Pensions and Lifetime Savings Association (PLSA), which aims to help retirees understand how much they need to save for a certain lifestyle in retirement.

The minimum level includes £96 for a couple’s weekly food shop, a week’s holiday in the UK, eating out once a month and some affordable leisure activities about twice a week.

There are also “moderate” and “comfortable” living standards, which include more holidays, theatre trips, running a car, and even beauty treatments. 

The cost of a moderate retirement has risen by 12% over the past year, while the cost of a comfortable lifestyle has jumped 11%.

Tom Selby, head of retirement policy at the investment platform AJ Bell, comments: “The cost-of-living crisis is placing a brutal squeeze on the budgets of millions of people, including those who have retired or are planning to ease down from work in the coming years.

“It is a sad fact that people on the lowest incomes are, on average, facing the biggest challenge, as they tend to spend larger proportions of their income on things like food and energy, both of which have seen eye-watering price rises over the last 12 months.”

We look at how the living standards are calculated, what sort of pension pot you’ll need to achieve a decent retirement, and how to boost your pension.

What are the retirement living standards?

The retirement living standards are based on independent research by Loughborough University. 

They describe the cost of three baskets of goods and services, comprising six categories: household bills, food and drink, transport, holidays and leisure, clothing and social and cultural participation.

The standards are regularly reviewed to ensure they keep up with changes in the public’s expectations of what retired households need, as well as changes to prices on the shelves.

The annual cost of a minimum lifestyle in retirement is now £12,800 (£19,900 for a couple), £23,300 for a moderate lifestyle (£34,000 for a couple), and £37,300 for a comfortable retirement (£54,500 for a couple).

A comfortable lifestyle includes three weeks' holiday in Europe every year, money for home improvements (such as replacing the kitchen or bathroom every 10 years), and spending more than £1,000 on clothing each year.

Minimum cost of retirement 

So, how much do I need to save to achieve these living standards?

The good news is that the big rise in the state pension will help most people achieve at least a minimum lifestyle.

The government’s commitment to the state pension triple lock, announced in the Autumn Statement, means the state pension will rise by a record 10.1% in April. A full state pension will increase from £185.15 a week to £203.85 a week, which works out to £10,600.20 a year.

So, a couple who are each in receipt of a full new state pension would reach the minimum retirement living standard. A single person would only need just over £2,000 in other income to reach the minimum standard of £12,800.

However, workers will need to save considerable amounts to reach moderate or comfortable standards.

According to the PLSA, a single person would need a pension pot of £248,000 to achieve a moderate lifestyle, or a massive £530,000 to enjoy a comfortable retirement. This is based on using the pension pot to buy an annuity, which is an insurance product that pays a guaranteed income for life.

If you’re in a couple, each person would need a pension pot worth £121,000 (for the moderate standard) or £328,000 (comfortable).

These amounts will depend on annuity rates at the time, so depending on when you retire and convert your pension into an annuity you could need a bigger pot to achieve the same income.

If you’d prefer to keep your pension invested (and not buy an annuity), analysis by AJ Bell shows that you’d need a much larger pension fund.

For a minimum standard of living in retirement, a single person would need a pension worth £52,000, for a moderate standard of living she would need £354,000, and for a comfortable standard, she would need £755,000. 

This assumes she withdraws the 25% tax-free cash as a lump sum (which you can usually take from your pension when you retire) and uses the remainder to generate an income to pay for her lifestyle.

Selby notes: “While these numbers might sound humongous, the key is to start early and save often, making the most of the employer contributions, tax relief and tax-free growth over decades.”

How can I boost my pension?

There are several ways you can boost your pension and ensure you have plenty of savings by the time you reach retirement.

The first thing to do is to look at your state pension. By checking your state pension you can find out how much state pension you have currently built up, and how much you are forecast to receive when you retire.

You should also check when you’re due to receive your state pension (you can do this quickly on the government website), although note that this may not be completely accurate as your state pension age could rise in future.

If there are gaps in your state pension record - you’ll need 35 years of National Insurance contributions to qualify for the full payout - you can pay something called voluntary “Class 3” contributions, otherwise known as National Insurance credits, to plug the gap and boost your state pension. We explain how it works and whether it’s the right to do in State pension: Does it pay to buy National Insurance credits? 

If you’re already receiving your state pension, check you’re actually getting the right amount from the government. Thousands of pensioners have been underpaid their state pension, with some claims dating back to 1985. 

What about my workplace pension?

Most employees will be saving into a workplace pension, thanks to the government’s auto-enrolment initiative. 

Some workers may have not been placed into a pension scheme though, perhaps because they work part-time and don’t earn enough. If you’re not in a workplace scheme, ask your boss or HR team if you can be manually added. 

You’ll benefit from tax relief on your pension contributions, plus money from your employer, meaning that paying in just a small amount each month could add up to a decent nest egg by the time you retire.

You can also check if increasing your pension contribution will trigger a higher contribution from your employer. Some companies will pay more in the more you pay in, up to a certain limit. This is free money that you could be leaving on the table (a bit like a pay rise, just delayed until you retire), so it’s definitely worth asking.

Speaking of pay rises, if you’re lucky enough to get a pay rise, consider whether you can funnel the extra money into your pension pot. Even if your employer doesn’t pay in an extra contribution, you will still benefit from tax relief, which is worth 20% to 45% depending on your earnings.

We have lots more tips and ideas in 10 ways to boost your pension savings and get a comfortable retirement

How much do I need to save each month?

Alice Guy at the investment platform interactive investor has crunched the numbers to work out how much you need to save each month to achieve a comfortable retirement.

According to the PLSA, a couple needs 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,” she comments.

“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.”

This means it could be achievable for a 27-year-old who pays £107 a month into their pension until age 67 to build up a pot worth £328,000. If you’re starting to save later in life, the monthly contribution will be higher.

Ruth Emery

Ruth Emery is contributing editor at The Money Edit. Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.