On 20 October, the Government will reveal the latest inflation rate figures. And for those of you keeping a tab on what it means for your State Pension, it could mean an incremental rise not seen in recent years, as those in the know predict the inflation rate to be as high as 4%.
But is this a good thing? And will you be able to afford a comfortable retirement?
Data suggests not necessarily.
First, let’s look at the basics.
How much is a State Pension?
The current full State Pension is £179.60 per week, which is £9,339.20 per year. But that’s not what everyone gets. Your actual rate is based on the number of years you’ve contributed to National Insurance, and you’ll need to have paid 35 years’ worth for the full rate. That’s a whopping 420 monthly payments!
The official age to qualify for State Pension is 66, but thanks to longer life expectancy, this is set to be upped to 68 in the near future.
Now that we’ve got that squared away, let’s turn our attention to costs in retirement.
The cost of a comfortable retirement
The Pensions & Lifetime Savings Association recently published a report detailing the costs of various levels of retirement, covering the minimum of humble living to more opulent golden years.
According to the study, a singleton requires an annual income of £34,000 for a comfortable retirement. For couples, this equates to £50,000 per year.
But what constitutes a comfortable retirement?
Living standards are subjective depending on one’s means and motivations. We could say, one man’s brussels paté is another’s foie gras.
A comfortable retirement is one where you’re able to be more spontaneous with your finances. You’d have at least one streaming subscription, regular beauty treatments, and two holidays abroad per year.
For a singleton, this includes:
- A weekly shop of £59;
- Annual clothing and footwear budget of £1,200;
- Birthday gift allowance of £50;
- 3 weeks in Europe;
- A 2-year-old car, replaced every five years; and
- Replace the bathroom and kitchen every 10 – 15 years.
It’s estimated that only one in six UK employees can afford this level of retirement.
Comparatively, a moderate and minimum retirement looks something like this:
|
Moderate Retirement |
Minimum Retirement |
|
Single: £21,000 a year |
Single: £11,000 a year |
|
Not as financially stable as the ‘comfortable’ crew, but moderately secure with some flexibility and freedom. You can afford one foreign holiday a year and to eat out a few times a month |
A lifestyle that covers your needs, with a little left over for fun and special occasions. This includes a holiday in the UK, eating out once a month, and affordable leisure activities twice a week |
|
A weekly shop of £47 |
A weekly shop of £41 |
|
£730 for clothing and footwear each year |
£410 for clothing and footwear each year |
|
Birthday gift allowance of £30 |
Birthday gift allowance of £10 |
|
2 weeks in Europe and a long weekend in the UK every year |
A week and a long weekend in the UK every year |
|
3-year old car replaced every 10 years |
No car – a lot of public transport is free for retirees! |
|
Some help with maintenance and decorating each year |
DIY maintenance and decorating one room a year |
|
Around half of employees are projected to have income between minimum and moderate levels for retirement |
About three-quarters of employees are likely to achieve at least the minimum level of retirement income |
Mind the gap … between the income and the lifestyle
The grave concern with this data is the evident gap between the costs of retirement and what is provided as a State Pension. At best, on a full State Pension, you’re looking at a £1,600 shortfall at the minimum level and around £25,000 shy at the comfortable level.
When we throw ballooning inflation rates into the mix, not even an equal increase in the Pension rate will offset the ‘real’ rising costs of living.
Your golden years should be a time to unwind and relax; a time to have the (financial) resources for the things that bring you joy.
However, there are actions you can take right now to address any financial shortfalls.
How to boost your income for retirement
- Check your National Insurance record for gaps, and if necessary or possible, make voluntary lump-sum contributions
- Make sure you’re receiving all National Insurance credits you qualify for
- Consider your current savings balances and whether you can afford to put even a few more pounds away a month
- Evaluate your investments and whether they’re forecasted to give you the payouts needed in the long term. If necessary, re-think your strategy or speak to a financial advisor who can offer guidance
