2022 marked the year when inflation hit a 40-year high, with figures in the last six months mostly in double digits. The skyrocketing inflationary environment continues to affect everybody, including retirees.
A study by the Pensions and Lifetime Savings Association (PLSA) revealed that the recent inflation levels have meant that the ‘minimum’ cost of retirement has gone up by nearly 20%.
More specifically, the cost of a minimum retirement standard has gone to £12,800 from £10,900 – up 18% for a single person; and to £19,900 ($24,200, €22,500) from £16,700 – up 19% for a couple.
According to the PLSA, the staggering increase was largely caused by a rise in food and fuel prices.
By comparison, the moderate retirement standard increased by 12% to £23,300 for a single person and by 11% to £34,00 for couples; while the comfortable standard went up by 11% to £37,300 for an individual retiree and by 10% to £54,500 for a couple.
The PLSA commended the UK government for sticking with its pledge to keep the triple lock for pensions, as the increase due in April 2023 of just over 10% will mean most retirees will be able to maintain a minimum retirement living standard.
But the association believes the triple lock is not going to be enough to ensure a sustainable level of income in retirement for the long term.
Nigel Peaple, director of policy and advocacy at the PLSA, said: “The past year has been an enormously challenging one for many households in the UK. Inflation has risen to its highest rate in 40 years with the cost of essentials and domestic fuel soaring, putting substantial pressure on incomes for working age and retired households, particularly for those on low incomes.
“These figures underline why the government was right to increase the state pension in line with the triple lock in the Autumn Statement.
“The jump in the retirement living standards underscores the need for the government to adopt the PLSA’s recommendations on pensions set down in our recent report, ‘Five Steps to Better Pensions’. These include the need for the government to adopt clear national objectives for retirement income, to ensure the state pension protects everyone from poverty and, later this decade once the cost-of-living crisis has passed, to increase the scope and level of automatic enrolment pension contributions.”
Rethink retirement plans
Emma Douglas, director of workplace savings & retirement at Aviva (and PLSA chair), said: “The PLSA targets continue to provide a simple and helpful framework to guide retirement planning. The amounts by which each income level has risen is a timely reminder of the importance of factoring the impact of inflation into retirement planning, to ensure that living standards are maintained throughout retirement.
“Record-levels of inflation mean the cost of retiring, as well as the cost of living, is at an all-time high. Pension pots that might have sustained a target living standard in retirement might now fall short, meaning that today’s retirees might consider rethinking retirement plans.
“Employees approaching retirement without the pension pot they would like, could reduce their hours rather than fully retiring. This could be a win-win for employers and employees. Employers keep experienced staff and employees boost their pension contributions and are less reliant on their pension fund. Those who have taken early retirement might consider returning to work part-time, to reduce the amount they need to take from their pension.
“The industry can help by providing modern pension solutions that are flexible enough to meet members’ changing needs. This might include giving members the right to partial retirement and allowing members to take their benefits while remaining with their current employer.
“Longer-term, reform of automatic enrolment (AE) regulations is needed to improve adequacy.
“The PLSA’s recommendations – Five Steps to Better Pensions – will help form a new national consensus on how best to build upon a decade of AE success so everyone can achieve the right income in retirement. The combined successful implementation of these recommendations could make a huge difference to the retirement income of today’s savers.
“Now, in the middle of a cost-of-living crisis, is not the time for radical change but by providing a clear ‘roadmap’ for reforms, government will give employers and pension savers time to plan, which will help to ensure better retirements.”
Tom Selby, head of retirement policy at AJ Bell, warns that it is not only retirees that are facing challenges, even those saving for retirement will have their fair share of hurdles in the current inflationary environment.
“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.”