By Justin Rourke, chartered senior financial planning manager, Armstrong Watson LLP
New research confirms many people are experiencing the growing gap between what the state pension provides and a comfortable retirement.
In April 2022, all state pensions increased by 3.1 per cent while the National Living Wage – another government-set base income level – grew by 6.6 per cent.
The manifesto-breaking one-year suspension of the triple lock means that the new state pension has reached £185.15 a week, approximately five per cent less than would otherwise have been the case.
Costs of living
The announcement of the new state pension rates came in the same month that an updated report was published that looked at retirement living standards in 2021. The report calculated the cost of three different baskets of goods and services that equated to three retirement living standards:
- Minimum, where income covers all needs, with ‘some left over for fun’;
- Moderate, providing more financial security and flexibility; and
- Comfortable, offering greater financial freedom and ‘some luxuries’.
For example, at the minimum level, a couple would have no car, while at the comfortable end of the spectrum each would have their own car, replaced every five years.
In between, the couple with moderate retirement living standards would replace a three-year old car every 10 years. There was less difference in food and drink budgets, which ranged from £67 a week to £94 a week.
The research, from Pensions and Lifetime Savings Association, put annual costs to each living standard for couples and singles, with an adjustment of up to £5,600 for the additional expense of living in London:
Minimum
- Single: £10,900 (London £13,200)
- Couple: £16,700 (London £21,100)
Moderate
- Single: £20,800 (London £24,500)
- Couple: £30,600 (London £36,200)
Comfortable
- Single: £33,600 (London £36,700)
- Couple: £49,700 (London £51,500)
These figures show the net income required and make no allowance for any tax.
So, for instance, a couple living in the North who want a comfortable standard of living would each need pension income of about £28,000 before tax.
If they were to rely on just one partner’s pension income, that would need to be almost £62,000 because higher rate tax would be payable on the excess over £50,270. Different pre-tax figures would apply in Scotland because of the country’s different tax bands.
Covering the shortfall
The uprated new state pension from April 2022 is equivalent to £9,628 a year, leaving a significant gap if your goal is anything other than the minimum retirement living standard (no car, no European holiday).
The shortfall is not a surprise – the UK has traditionally occupied the bottom slot in international comparisons of state pensions undertaken by the OECD. Given the condition of government finances and an ageing population, the UK is unlikely to advance up the OECD’s pension league table.
There are fewer and fewer people who will benefit from generous final salary (defined benefit) schemes.
Bridging the gap between the retirement living standard you want and what the state will provide requires more people to contribute to private pensions.
Determining how much the gap-filling will cost and what form it takes begins with a detailed review of your current retirement plans. The sooner you contact us to start that process, the longer the period over which you can spread the investment required.
As chartered financial planners, Armstrong Watson Financial Planning & Wealth Management, work with you to build your retirement plans and regularly review these so you know if you will remain on track.
We use cashflow forecasting to allow you to understand your plan more easily so you can make informed decisions. For help and support with your financial planning contact Justin Rourke on 01768 222030 or email justin.rourke@armstrongwatson.co.uk for a complimentary initial consultation.
- Armstrong Watson Financial Planning Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 542122. Registered as a limited company in England and Wales, number 7208672. The registered office is 15 Victoria Place, Carlisle, CA1 1EW. Armstrong Watson Financial Planning & Wealth Management is a trading style of Armstrong Watson Financial Planning Limited.
