Why 2023 is the WORST year to start retirement

Hundreds of thousands of older workers retiring this year will do so at the “worst and most stressful” time in a very long time, experts warn.

They will need an extra £145,000 to get the same pension they could have afforded at the beginning of last year, calculations for The Mail on Sunday show.

This is because out-of-control inflation is rapidly eroding the purchasing power of savings, while falling stock markets have wiped out thousands of pounds of the value of pension pots.

More than 700,000 Britons will turn 65 this year and there are fears that many will risk running out of money if they don’t postpone retirement.

It has been calculated that the rising cost of living over the past year has already resulted in pensioners needing an extra £90,000 to meet the same standard of living.

But with inflation stubbornly high, the amount needed in a retirement pot at the start of retirement will rise by a further £55,000 by the end of 2023, according to asset manager Brewin Dolphin, whose asset manager Carla Morris says it’s a particularly challenging time retire compared to previous years.

A single pensioner needs £37,300 a year to manage a ‘comfortable’ retirement, according to industry association the Pension and Lifetime Savings Association.

That’s £3,700 – or £308 per month – on top of what was needed in 2022. However, if inflation averages 7 per cent in 2023, as predicted by accounting firm Mazars and economics research group Moody’s Analytics, pensioners will find a further £2,600 per year.

The new state pension, currently worth £10,600 a year, covers just over a quarter of the income needed to live comfortably.

The amount pensioners need to buy this ‘comfortable retirement’ income from an annuity will rise by £145,000 this year to £685,000, says Ms Morris. These contracts exchange a lump sum of cash for a guaranteed annual income until death.

Three out of four people think they don’t have enough in their pension pot to retire, according to a survey by Brewin Dolphin.

Rebecca O’Connor of PensionBee says retirees are facing a double whammy as they need more money to live, but also have less savings after markets fall.

“It is certainly a more difficult time to retire. There is a higher cost of living, but many have also experienced negative growth in their pension pot,’ she says.

Those retiring this year risk committing any losses they’ve incurred on their retirement investments and destroying any hope of their fund’s recovery, she adds.

“Very often we are told not to time life events. For example, if you need to buy a house, don’t try to time the real estate market. But when it comes to your pension pot, you absolutely have to take the economic circumstances into account where possible.’

Steven Cameron of retirement group Aegon says those who can afford it should consider putting off retirement for a few years to minimize the destructive effects of inflation.

‘It’s a much more stressful time to retire – and the best way to protect your prospects is to work a few more years. This allows you to save more and you have a larger pot to fund a shorter pension.’

Other options for increasing retirement income include increasing retirement contributions while you’re still working and making sure your retirement savings are invested to get the best possible return.

O’Connor warns that people may also need to rethink their retirement expectations.

“For years you may have thought you were entitled to a pension that came with fun hobbies and vacations, but people need to recalibrate quickly because they realize they won’t have enough money for that now,” she says.

Earlier this month, the leading think tank the Institute for Fiscal Studies sounded the alarm about a looming pension crisis.

It claims that future retirees will be far less well off than current retirees.

Those concerned about their finances should split their savings to generate different sources of income, says Carla Morris of Brewin Dolphin.

You do this by combining an annuity – which provides a low but guaranteed income every year until your death – with investing in the stock market.

“Knowing that a large portion of your bills are covered can give you some comfort while keeping an invested portion to cover further expenses,” she adds.