The costs go way up for pensioners who want extra luxuries like a three-week holiday in Europe
Older savers withdrew more than £10bn from their pensions last year and may need even more as the cost of living crunch continues.
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But retirees are being warned to “stop and think” before accessing their cash, said the Daily Express.
“Withdrawing too much, too soon from your fund means you’ll increase the risk of running out of money early, and potentially being left relying on the state pension,” Tom Selby, head of retirement policy at broker AJ Bell, told the newspaper.
Pension reforms introduced in April 2015 let people take out as much money as they want from their retirement savings from the age of 55, subject to income tax. That is on top of the 25% lump sum that retirees can access.
The latest quarterly data from HMRC shows the average taxable withdrawal between April and June 2022 was £7,000 – up 23% annually.
Deciding when to access your pension is “fraught” at the best of times, said the Financial Times, as it can be hard to cater for unexpected expenses. The cost of living crisis has made deciding how much you need for retirement and when to withdraw your pension money even “less predictable”.
How much money do you need for retirement?
The general rule of thumb, explained Which?, is that you’ll need between half and two-thirds of the income you had when you were working (after tax) to maintain your lifestyle once you retire. “This is because you might have paid off the mortgage and will no longer be bringing up children, so can get by on less.”
The actual amount you need in retirement will depend on your living standards and ultimately where, when and what you want to spend your money on.
If you plan to go on luxurious holidays, said The Times Money Mentor, then you will need more money “compared to someone who plans to spend most of their retirement gardening and reading books at home”.
Data from the Pensions and Lifetime Savings Association (PLSA) suggests a single pensioner needed £12,800 a year in 2022 to maintain a minimum standard of living – up 18% annually. A retired couple now needs a minimum of £19,900 a year – up 19%.
This reflects what a retiree needs “not just to survive but to live with dignity”, the PLSA explained, “including social and cultural participation”. It includes £96 for a couple’s weekly food shop, a week’s holiday in the UK, eating out about once a month and some affordable leisure activities about twice a week. It does not include a budget to run a car.
The costs increase to £23,300 a year for a single person or £34,000 for a couple if you want a moderate retirement with extra luxuries such as a longer holiday. If you want a “comfortable” living standard in retirement, which might include regular spa treatments and a three-week holiday in Europe every year, you’ll need £37,300 a year, or £54,500 for couples.
How much should you save into a pension?
“If the thought of living on little more than £1,000 a month in retirement” – for the minimum standard of living – “alarms you,” said The Guardian, “then there’s only one thing you can do – save more now, before you stop working.”
The state pension will provide regular income that can go towards your living costs, but at its current level of £203.85 a week or £10,600 per year, it is unlikely to be enough to live on.
A couple both receiving a full state pension would also need to accumulate retirement pots of £121,000 each to get a moderate retirement income of £23,300 a year, said This Is Money, but a single person with only one state pension coming in would have to save a bigger pot of £248,000.
It’s never too late to start saving into your pension, added The Times Money Mentor, but if you start later in life then your monthly contributions should be higher than if you had started when you were younger.
“This is partly because your pension investments won’t have had as long to grow and benefit from the power of compounding,” the website said. “This is where the return on an investment in one year will produce a bigger-value investment for the return to go to work on the following year.”
The simplest way to find out whether you are saving enough for the kind of annual income you want, said Good Housekeeping, is by using a pensions calculator tool such as MoneyHelper’s or from your own pension provider or financial adviser.
More than 70% of over-55s said they were yet to achieve their life goals, according to Royal London. “Don’t let that be you,” said Good Housekeeping. “Setting aside some time to work out how much you need, how much you have now and how to bridge the gap will help you achieve your goal.”
Marc Shoffman is an award-winning freelance journalist, specialising in business, property and personal finance. He has a master’s degree in financial journalism from City University and has previously written for FTAdviser, ThisIsMoney, The Mail on Sunday and MoneyWeek.
