How much income do you need for retirement?

Poorer retirees have had to bear much heavier increases in the cost of living in the past year than better-off retirees, new research shows.

The cost of a modest pension has risen by as much as 18 per cent to £12,800 for a single person and by 19 per cent to £19,900 for a couple.

Low-income retirees are having to spend more of their budgets on food and energy, which have become much more expensive, explains the Pensions and Lifetime Savings Association.

The latest influential report on the standard of living in retirement reveals what annual income people need for a minimal, moderate or comfortable retirement.

These are based on different baskets of goods and services such as food and drink, transport, holidays, clothing and social outings.

The study also, crucially, explains how much younger generations must have saved by the time they retire to achieve a decent standard of living in old age.

The heavy pressure on working-age and retired households, particularly those on low incomes, underscores why the government was right to raise state pensions in line with the triple lock, the PLSA says.

This gives a triple increase in the state pension by 10.1 per cent to £203.85 in April, or an annual income of £10,600, if you qualify for the full flat rate.

That’s £2,200 – almost £200 a month – less than the annual income people need for a minimum pension standard, according to the PLSA.

This is the amount an individual would need, but the combined purchasing power means a couple would need less than double for £19,900 combined.

The PLSA, a financial industry-backed body, also notes that higher interest rates will help alleviate cost pressures as savers can get more attractive annuity rates for their retirement pots. They also get better rates on savings accounts.

How has the cost of living increased in retirement and why?

Rising prices have affected some goods and services more than others, with a knock-on effect on retirees of different income levels, explains the study conducted for the PLSA by the Center for Research in Social Policy.

Headline inflation was 10.7 percent in November, down from 11.1 percent in October.

Minimum Lifestyle: £12,800 or £19,900 a year

The PLSA study uses the same income level as the Minimum Income Standard of the influential Joseph Rowntree Foundation.

This reflects what people think is necessary to meet the needs of a retiree, not only to survive, but also to live with dignity and enjoy some social events.

“Rising food and fuel prices were major contributors to raising the minimum standard,” the PLSA says.

‘Due to the update, the amount of food included in the budget has also increased in order to align with current nutritional research into healthy nutrition.

“The disproportionate increase in the cost of retirement for people of minimum living age means that the government’s commitment to the state’s triple lock is particularly important.”

A couple each receiving a full new AOW pension of £10,600 a year from April would reach the minimum income, but a single person would need to supplement this with their own pension savings of £36,500.

Moderate Lifestyle: £23,300 or £34,000 a year

The increase in annual income required at this level is more in line with inflation, as it increased by 12 per cent to £23,300 for a single pensioner and by 11 per cent to £34,000 for a couple.

A couple who both receive a completely new state pension would also have to build up a pension pot of £121,000 each, but a single person with only one state pension coming in would have to save a much larger pot of £248,000.

Comfortable Lifestyle: £37,300 or £54,500 per annum

The cost of living rises similar to the moderate level, rising 11 per cent to £37,300 for a single person and 10 per cent to £54,500 for a couple.

“Retirees can expect more luxuries, such as regular beauty treatments, theater trips and three weeks of holiday in Europe per year,” says the PLSA.

A couple who both receive a completely new state pension would also need a pension pot of £328,000 each, while a single person would need to save £530,000.

What cost-of-living trends did the study uncover?

The 130 percent increase in weekly household fuel costs between 2021 and 2022 has been the most significant factor in the cost of living increase across the three income levels, according to the PLSA.

“The increase in the weekly cost of home fuel is responsible for 30-40 percent of the increases in total budgets for a minimal, moderate and comfortable standard of living in retirement,” it says.

It also found that increases in car costs at the moderate and comfortable level, driven by increases in the price of used cars, gasoline and diesel, have resulted in a 16 percent increase for this component of budgets. The minimum income assumes that people use public transport.

“Expenditures on food and fuel are categories that have seen significant price increases during the year and account for at least a third of the budget, compared to about a quarter at the moderate and comfortable levels,” the PLSA added.

“The absence of social contact during Covid lockdowns has reinforced the need for many to be able to spend some budget on social activities as a way to participate in society.

“All budgets include some expenditure on social and cultural participation, accounting for one-fifth of the minimum income, but a larger proportion of the moderate and comfortable levels.”