Personal pension: Moneybox explains the benefits
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With the state pension not enough to cover the average pensioner’s spending for a year, it is vital that savers make their own personal pension contributions in order to live the life they want in retirement. The Retirement Living Standards suggest pensioners will need more than £850 on top of the state pension each year as an absolute minimum.
In order to show what retirement will potentially look like for Britons, the Pensions and Lifetime Savings Association (PLSA) published their Retirement Living Standards, which show how much a pensioner will need to have the retirement lifestyle they desire.
To calculate the cost of retirement at a ‘minimum’, ‘moderate’ and ‘comfortable level, the PLSA looked at how much one would need to spend on housing, food and drink, transport, and therefore how much would be left over for holidays & leisure, clothing & personal and helping others.
A ‘minimum’ lifestyle covers the essentials and provides a modicum of income left over to use for pleasure and social occasions. Of course, the amount of income needed changes for a single pensioner compared to a couple.
For a single retiree, £10,200 is needed for a ‘minimum’ retirement, compared to £15,700 for a couple. This allows for a £38 weekly food shop (£67 for a couple), £460 per person for clothing and footwear each year, and covers the costs of DIY home maintenance and the decoration of one room per year.
This would also afford a week’s holiday in the UK, as well as a long weekend, and £10 for each birthday present given to a friend or family member. However, this level of retirement income does not cover the cost of a car.
The minimum lifestyle would mean retirees could eat out about once a month and also do some affordable leisure activities a couple of times a week. Around three quarters of employees are likely to achieve this minimum standard of retirement living.
A ‘moderate’ retirement lifestyle requires £20,200 for a single pensioner and £29,100 for a couple. This level of income provides more financial security and flexibility to British retirees than the ‘minimum’ level.
This provides a £46 weekly food shop, or £74 for a couple, as well as £750 per person for clothing and footwear per year. It also allows for some help with maintenance and decorating every year. Unlike the ‘minimum’ level, it also allows for a vehicle, namely a three-year-old car replaced every ten years.
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The extra income afforded at this level allows for Britons to have two weeks on holiday in Europe each year, as well as a long weekend in the UK. More money is also available for helping others, as £30 can be used for each birthday present.
It would also allow pensioners to eat out a few times per month, and generally do more things they want to do. Roughly half of British workers are expected to have an income between minimum and moderate.
The final of the three tiers is the ‘comfortable’ retirement lifestyle, which allows for even more financial freedom and some luxuries, allowing pensioners to be more spontaneous with their money. It is expected that around one in six UK employees will have an income between moderate and comfortable.
The single pensioner would need to have an income of £33,000 per year to have a ‘comfortable’ life in retirement, with this rising to £47,500 for couples. This would allow for a £56 weekly food shop, or £91 for a couple.
£1,000 to £1,500 could be spent on clothing per person per year, and a two-year-old car could be maintained and replaced every five years. This level of income would also allow people to replace their kitchen and bathroom every 10 to 15 years.
In terms of holidays, a ‘comfortable’ retirement life would mean a British pensioner could holiday in Europe for three weeks every year. They would be able to spend £50 on each birthday present, and could afford a subscription to a streaming service and regular beauty treatments.
The PLSA hopes these standards will one day become a rule of thumb for retirement planning, and they highlight the need for savers to contribute to their own retirement, as the state pension will not be enough.
The full state pension is worth £179.60 per week, which adds up to £9,339.20 a year. That means at even the minimum retirement level, a single pensioner would need an extra £861 of private pension savings to bridge the gap.
That means if a single pensioner lived for 15 years after retiring, they would need £12,915 in personal pension savings at a minimum. This would be even more for recipients of the basic state pension, of which the full amount is £137.60 per week.
Britons hoping to live a ‘moderate’ retirement life would need an extra £10,861 each year on top of their state pension, which would mean private pension savings of £162,912 would be needed across 15 years of retirement.
For a comfortable life in retirement, a retiree would need £23,661 more each year to top up their state pension, or a whopping £354,912 for 15 years of retirement.
Auto-enrolment has helped workers get started in contributing to their pension, but the trade body Equity Release Council has claimed that paying in the minimum allowed under auto-enrolment would provide the average saver with just 15 percent of their final salary in retirement, indicating that British employees need to do more to boost their pension pot.
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