An individual hoping to achieve a comfortable lifestyle in retirement would need a pension fund of £645,000, after the Pensions and Lifetime Savings Association’s (PLSA) Retirement Living Standards (RLS) inflation update, analysis by Quilter has found.
The PLSA update revealed that the annual increase in what is needed to achieve each standard of living over the past year was “by far the biggest” since the standards were introduced in 2019, with rising prices pushing RLS minimum costs up by almost 20 per cent. .
Based on this increase, Quilter found that a comfortable retirement would require a single person to have an annual income (before tax) of £26,700 a year on top of the State Pension, which is £10,600 a year in 2023–24.
Meanwhile, someone looking to achieve a moderate lifestyle in retirement would need to build up a pension fund of around £301,000, while those looking to achieve a minimal lifestyle would need to build up a bank of around £44,000 on top of their state pension.
Commenting on the findings, Quilter’s Head of Pensions Policy, Jon Greer, said: “While these figures are indicative only, it’s worth noting that you need to build up a fairly significant retirement fund just to achieve a moderate lifestyle.
“Starting young is key because pension funds have a compounding effect that helps money grow much more the longer it’s in the bank.”
But Greer pointed out that all PLSA figures assume retirees are living in their homes without rent or mortgage, and warned that while the numbers make sense now, they could increase “significantly” for future generations.
“This is due to soaring property prices, which means many are struggling to find the money to buy a home or are being forced to take out marathon mortgages with terms stretching up to 70 years to achieve lower monthly mortgage payments,” he explained.
“Similarly, the PLSA figures also do not take into account the potential cost of social care need.”
Those concerns were echoed by PensionBee public affairs director Becky O’Connor, who warned that the RLS “set the benchmark for retirement living standards now, not what today’s younger workers will need in the future, after decades of higher inflation, which remains difficult measure”.
“There are also a number of significant potential costs that this standard of living does not take into account, but which, if incurred, could have an impact on standard of living,” she continued.
“For example, the increasing number of older people living in private rented accommodation is a threat to retirement for those who will still be paying housing costs when they stop working. Many elderly people also wish to gift money to adult children or
grandchildren. The possible costs of care must also be taken into account.’
However, O’Connor admitted that many savers would “take heart” from the figures and hailed the update as “a useful indicator of what to focus on”.
Wider industry experts also highlighted the RLS increase as a “crucial guide” for those planning to retire in challenging circumstances, with Standard Life’s managing director of individual retirement Claire Altman noting that savers will have to deal with the impact of high inflation . and also the cost of living crisis.
She continued: “The current economic environment has not made it easier for people to manage their retirement savings, and while flexibility is important when it comes to retirement income, there is also a demand for certainty.
“Some of these certainties are best met with annuity income, and with rates going up, that really benefits retirees.”
Stuart Murphy, head of legal and general investment management, Stuart Murphy, also highlighted the update as a “sharp read” and highlighted the need for the pensions industry to support savers.
“In uncertain times, the pensions industry must focus on supporting all members to make informed financial decisions, manage today’s economic challenges while supporting savers’ long-term retirement prospects where possible,” he said.
“These figures also highlight the urgent need for pension reform – particularly in relation to the widening of auto-enrolment criteria – to ensure no one is left behind.”
In particular, head of policy, pensions and investment at Scottish Widows, Pete Glancy, suggested that a slight replacement of the rules on employer contributions could help savers in this “difficult time”.
He explained: “The situation would be improved by allowing lower-paid workers to temporarily change their occupational pension contributions when their financial situation changes – without losing their entitlement to employer-paid pension contributions.
“Employer pension contributions are effectively deferred payments and anyone struggling to make ends meet should not be further penalized for needing to keep more of their money now.”
The LCP DC leader also highlighted the need to consider reform, adding: “At a time when we are hearing more and more people want to stop or reduce their pension contributions, it is a reminder that auto-enrolment levels and the national consensus on adequacy need to be seriously assessed pension to ensure people have enough savings for the future.’