Crunching the numbers on how much you need for the retirement you want

Rising prices for food, essentials and leisure have hiked what people need from their pensions in retirement, according to the latest Retirement Living Standards from Pensions UK.

A ‘comfortable’ lifestyle is now priced at £45,400 a year for a single person, with the ‘moderate’ and ‘minimum’ lifestyles coming in at an annual cost of £32,700 and £13,900 respectively.

Although 82% of people are expected to achieve the minimum standard, only 23% will move further up the ladder, meanwhile, just 9% are expected to achieve a ‘comfortable’ retirement, which could require a pension pot of up to £845,000, alongside a full state pension.

The recent Pensions Commission report has identified that 15 million people are under saving for retirement but being told you need £500,000 saved for even a moderate standard of living in retirement can be overwhelming.

The role of pensions hasn't changed, but the amounts you need in them have

Pension savings are ultimately there to pay us an income when the times comes to retire, but the shift from pension promises to pots can sometimes leave people scratching their head at how much they need to put away. 

The Pensions UK figures can help people crunching the numbers to work out what they’ll need to get by, depending on how they want their retirement to look.

But sticky inflation baked into the record price hikes we saw in the early 2020s means the pension pot values required to generate those incomes have also soared, and some people are likely to find themselves behind.

Automatic enrolment has been successful in getting more people saving into a pension in the first place, for anyone getting just minimum contributions is particularly at risk of their savings not meeting their retirement expectations. The same goes for people who intend to rely on little more than the state pension alone, including many self-employed people. 

Without taking control of their pension pots, increasing contributions and making the most of the tax perks on offer, those currently saving for retirement will be forced to choose between working far longer or living on a pittance in their later years.

What are the Pensions UK Retirement Living Standards?

The standards are designed to give a guide based on various assumptions on what retirees will spend at three different levels: minimum (covering the basic essentials), moderate and comfortable. Each level uses a range of common goods and services to calculate an income figure, after tax. For example, the moderate living standard allows for some help with DIY, a used car replaced every seven years and one two-week holiday abroad together with a UK mini-break every year.

It also allows for takeaways and eating out a couple of times a month as well as money to spend on clothing and personal items. 

The minimum standard factors in a much more constrained budget for clothes and other items, a week-long UK holiday and no car. While the comfortable standard allows for more eating out, a used car replaced more frequently, a fortnight's holiday in the Mediterranean and three long weekend trips at home.  

But none of the standards assume housing costs, which might reflect retired life for those becoming mortgage free, while others may continue to rent or face paying their mortgage even as they start accessing their pension.

It’s therefore important to remember that the costs and income needed will vary significantly depending on location and personal circumstances.