The cost of living has risen significantly in the last few years so it’s probably no surprise to learn that new research has revealed that this has pushed up the amount of money you’ll need to fund your retirement. We look at the facts behind this rise and what it might mean for you.

Most of us are saving more for our retirement, but with the price of essentials rising, it’s important to keep an eye on the amount we need to support ourselves when we have [or plan] to give up work.

The cost of maintaining even a minimum level of spending when we are no longer working has gone up, and by quite a bit.

According to the latest Pensions and Lifetime Savings Association (PLSA) Retirement Living Standards we need to save an average of around 16 per cent more into our pensions.

The PLSA’s standards use annual inflation (how much prices of things rise by), different levels of retirement as well as the amount of State Pension to work out how much we might need to spend when we stop working.

Our enthusiasm for eating out and holidays, since the Covid pandemic, has also increased and this also means we need to save more.

The PLSA’s standards include research from the University of Loughborough and are used as a benchmark by the pensions industry.

What are the PLSA’s Retirement Living Standards?

The PLSA came up with the Retirement Living Standards a few years ago to help people work out how much income they might need to cover the cost of living in retirement. There are three different retirement scenarios, based on how much you would need to spend to maintain three different types of lifestyle – minimum, moderate and comfortable.

The first ‘minimum’ covers the basic expenditure needed to pay bills and everyday expenses, but it does still allow for some non-essential spending.

The second ‘moderate’ assumes a bit more spare cash, while the third ‘comfortable’ allows - as it says - for greater freedom and choice including foreign holidays, leisure activities, meals out and other luxuries. We explain a bit more about each of these below.

What is a minimum standard of retirement?

 This is the kind of income that covers basic needs, with a small amount left over for what the PLSA calls ‘fun and social occasions’. It says: “You could holiday in the UK, eat out about once a month and do some affordable leisure activities about twice a week.” 

What do I need: For a minimum standard of retirement the research estimates that your outgoings will be around £14,400 a year if you are single or £22,400 a year if you are a couple. If you are saving into a private pension, this means that you’d need a joint pot of around £60,000 saved up to achieve this (assuming that you’ll also be entitled to receiving the full state pension).

What is a moderate standard of retirement?

This is more than the minimum standard as there is more left over for non-essential spending. This amount means you can afford at least one foreign holiday a year and eat out a few times a month.  The research estimates that if you’re single your outgoings will be around £31,300 a year or £43,100 if you are a couple.

What is a comfortable standard of retirement?

A comfortable retirement means being able to afford to pay for a subscription to a TV streaming service, regular beauty treatments, a foreign holiday as well as several UK mini-breaks a year. Estimated outgoings for a ‘comfortable’ lifestyle are £43,100 a year if you are single or £59,000 a year if you are a couple.

It’s important to highlight that any outstanding mortgage or rent payments are excluded from these figures.

How much do you need in your pension?

 Although these scenarios can look quite scary, they do not take into account everyone’s circumstances.

For example, you may not want to go on a foreign holiday every year, you may also still have a mortgage with a few years left, and you might want or expect to work part time into your retirement.

If you own your own home, you may also plan to downsize and sell your home to boost your income, and you may have loans and credit cards which you expect to pay off a couple of years into your retirement; so although you have some initial expenses they won’t be dragging down your monthly income long term.

Before working out what pension income you need to live on, you should bear in mind:

• How long you have until retirement - the longer you have the more you can save, or even top up with other savings.
• Whether you plan to give up work completely - it could be you want to carry on working part-time, get a side hustle going, such as selling on eBay or even look into starting a different career.
• Whether you have any long-term debts or financial commitments - such as a mortgage.
• What type of lifestyle do you want - do you want to travel, or are there other things you might want to do?
• Do you have extras you might need - do you want to keep running a car or maintain any hobbies that you have now?

What about my state pension?

As from April 2024 the full state pension will be £11,500 per year, so if you have other savings then they could go a long way towards helping you maintain a decent retirement income. You might want to check your entitlement to other benefits.

Based on the PLSA research, if you are looking at a minimum lifestyle then you’ll need to find around £3,300 in extra income per year on top of your State Pension.

What can I do to help boost my pension now?

If you have not already - make a budget. The government website Moneyhelper has a budget planner tool you can use to see whether you can afford to save any more money into your pension

Remember that one of the benefits of saving into a pension is the tax boost you get from the government. If you are a basic rate taxpayer this means that for every £100 it only costs you £80.

Your employer will be putting aside money into your pension too. By law they have to put an amount worth at least three per cent of your salary into your pension if you meet certain criteria: this is in addition to your monthly salary. Some employers also contribute more if you pay in more – it’s worth checking with your employer to see if this is something they offer.

How can I make my pension money last?

Give yourself an idea of how long you may need to live on your pension. This is probably not the easiest question to ask yourself but you need to be aware of how long you may need to make your money last.

To help you work this out, you can use a life expectancy tool like this one on the Office for National Statistics website.