It’s hard to picture the future. Various studies have found that we tend to reward ourselves today, at the expense of our future selves. This can apply in areas including health, diet (one more doughnut surely won’t hurt?!) and our personal finances.
When it comes to retirement planning, 51% of us focus on current needs and wants at the expense of providing for the future. Only 23% of people are confident they know how much they need to save.
This new research supports the launch of the UK Retirement Living Standards, which could help people picture their future retirement and what that might cost. Produced by the Pensions and Lifetime Savings Association (PLSA), the New Retirement Living Standards are pitched at three different levels – minimum, moderate and comfortable. The standards are based on a basket of goods and services, including food, drink and holidays. The independent research was conducted by the Centre for Research in Social Policy at Loughborough University. It was based on the well-respected Minimum Income Standard developed for the Joseph Rowntree Foundation.
In each new Retirement Living Standard, there are different standards of living, with a relevant basket of goods and associated costs for each. Each was established based on what members of the public feel are realistic and appropriate expectations for living standards in retirement. The basket of goods is made up of household bills, food and drink, transport, holidays and leisure, clothing and personal and helping others.
These new Retirement Living Standards are a useful way to fill gaps in current approaches towards planning for retirement. They can form a practical first step on a retirement planning journey.
The PLSA wants the Retirement Living Standards to become a widely adopted industry standard. For example, some pension schemes will use them in general information for scheme members, in annual benefit statements, or to develop personalised targets for pension planning.
The minimum living standard in retirement has been set at £10,200 a year for a single person and £15,700 for a couple. These amounts cover the cost of basic needs in retirement, as well as enough to have some fun. For example, within this budget is enough to holiday in the UK, eat out about once a month, and do some affordable leisure activities a couple of times each week.
With a combination of a full state pension of £8.767.20 a year and auto-enrolment in a workplace pension, this minimum standard should be achievable by most.
The cost of a moderate retirement lifestyle was calculated at £20,200 a year for an individual or £29,100 a year for a couple. At this level of retirement income, there’s more financial security on offer and greater flexibility. There’s more money for fun too; the budget includes a two-week holiday in Europe and eating out a couple of times each month.
The comfortable level has been set at £33,000 a year for an individual or £47,500 for a couple. This income is sufficient to cover some luxuries, including regular beauty treatments, theatre trips, and three weeks in Europe a year.
To make these Retirement Living Standards easier to remember, the PLSA has summarised them as £10,000 a year for minimum, £20,000 a year for moderate, and £30,000 a year for comfortable; or 10k-20k-30k. For couples, it’s 15k-30k-45k.
Nigel Peaple, Director of Policy and Research, PLSA, said:
“The Retirement Living Standards will support better saver engagement. They distil robust, in-depth research with the public into an easy to understand basket of goods that helps people picture the future – and relatable figures that can provide a powerful and practical tool for encouraging engagement with saving.
“A recent PLSA survey showed 76% of people with a workplace pension agree that Retirement Living Standards would help them know if they were on track for the lifestyle they want in retirement.
“The PLSA looks forward to working closely with the pensions industry to ensure widespread adoption of the Retirement Living Standards to transform the way people think about saving for spending in later life.”
Guy Opperman, Minister for Pensions and Financial Inclusion, said:
“We have transformed saving for retirement for millions of people and the next challenge is to make it easier for them to engage more with their pensions. It’s great to see what the PLSA has developed which has the potential to help savers think about the future and plan for the retirement they want.”
Jackie Spencer, Senior Policy and Propositions Manager, Money and Pensions Service, said:
“Saving for something is easier to do when you can visualise what you’re working towards, which is why people are often more motivated to save for short-term goals like holidays and new cars than they are for their retirement.
“The new Retirement Living Standards are a great way of offering savers some practical examples of what they can expect from their lives when they stop working. The Money and Pensions Service has agreed to be an early adopter of the new standards and will be looking to incorporate them into pension guidance and our online pension calculator.”
Of course, our income needs in retirement are very personal and will differ between individuals and couples. While these standards represent a good starting point for thinking about the cost of retirement, it’s essential to tailor the exercise to suit personal requirements.