AJ Bell : Inflation drives 18% surge in cost of 'minimum' standard of living in retirement

Inflation drives 18% surge in cost of 'minimum' standard of living in retirement

Tom Selby

12 January 2023

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AJ Bell press comment - 12 January 2023

Retirees aiming to achieve a basic standard of living will have seen their spending rise by 18% over the past year, new research shows

• Lowest income pensioners face the biggest squeeze as, on average, they spend a larger proportion of their budget on high inflation items like food and energy
• People aiming for 'moderate' and 'comfortable' retirements also face double-digit increases in living costs
• According to the PLSA, a single person would need to spend:
  • £12,800 a yearto enjoy a 'minimum' standard of living in retirement (up 18% from £10,900)
  • £23,300 a yearfor a 'moderate' standard of living in retirement (up 12% from £20,800)
  • £37,300 a year for a 'comfortable' standard of living in retirement (up 11% from £33,600)
• AJ Bell analysis* suggests a single person could need a pension pot worth:
  • £52,000to enjoy a 'minimum' standard of living in retirement
  • £354,000to enjoy a 'moderate' standard of living in retirement
  • £755,000to enjoy a 'comfortable' standard of living in retirement

Tom Selby, head of retirement policy at AJ Bell, comments:

"The cost-of-living crisis is placing a brutal squeeze on the budgets of millions of people, including those who have retired or are planning to ease down from work in the coming years.

"It is a sad fact that people on the lowest incomes are, on average, facing the biggest challenge, as they tend to spend larger proportions of their income on things like food and energy, both of which have seen eye-watering price rises over the last 12 months.

"That said, retirees are facing painful increases in living costs across the board, with the spending needed for a single person to enjoy 'moderate' and 'comfortable' living standards in retirement increasing by 12% and 11%, respectively."

What size pension pot might people need?

"Soaring inflation places significant pressure on people's pensions in two fundamental ways. For those saving for retirement, it means their target pension pot is bigger, meaning they might need to squirrel away a bit more each month in order to enjoy the retirement they want.

"Even to enjoy a minimum standard of living in retirement, a single person entitled to the full state pension might need a pension pot worth £52,000. People aiming for a moderate standard of living, meanwhile, face a target of just over £350,000, with those wanting a comfortable living standard in retirement potentially needing a pension worth around three-quarters of a million pounds*.

"While these numbers might sound humongous, the key is to start early and save often, making the most of the employer contributions, tax relief and tax-free growth over decades.

"For those already taking an income from their pot while staying invested, the big challenge is sustainability. Anyone who wants to maintain their standard of living might be forced to increase withdrawals by over 10% this year, which in turn increases the risk of running out of money in retirement.

"It is vital anyone considering withdrawing more money from their pension to cover rising living costs balances the benefits of maintaining their standard of living with the risk that might be posed to the sustainability of their plan. While this might involve unpleasant choices, most people don't want to be left relying on their state pension alone in their later years."

Source: PLSA

*Assumptions: 25% tax-free cash excluded, annual investment growth of 4% post-charges, state pension (initially set at 2023/24 rate) increases by 2% per year, annual spending increases by 2% per year, all income over £12,570 (the current personal allowance) taxed at 20%, fund runs out after approximately 30 years.

Tom Selby Head of Retirement Policy

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.

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