Retirement Income  

Inflation drives 18% surge to 'minimum' cost of retirement

Inflation drives 18% surge to 'minimum' cost of retirement

Retirees trying to achieve a basic standard of living will have seen their expenditure increase over the past year by almost 20 per cent due to high inflation, according to the Pensions and Lifetime Savings Association’s retirement living standards. 

In its latest update published today (January 12), the PLSA found that people on the minimum lifestyle have seen the biggest percentage increase to the cost of their retirement.

This is owing to a higher proportion of their budget going towards the things that have risen the most in price: food and energy.

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Source: PLSA

Tom Selby, head of retirement policy at AJ Bell, said it is a “sad fact” that people on the lowest incomes are, on average, facing the biggest challenge.

“That said, retirees are facing painful increases in living costs across the board, with the spending needed for a single person to enjoy ‘moderate’ and ‘comfortable’ living standards in retirement increasing by 12 per cent and 11 per cent, respectively,” he said. 

“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.”

The PLSA said the figures highlighted the need for pension reform to help more people achieve an adequate income in retirement.

Based on independent research by the Centre for Research in Social Policy at Loughborough University, the retirement living standards describe the cost of three different baskets of goods and services, established by what the public considers realistic and relevant expectations for retirement living. 

These baskets comprise six categories: household bills, food and drink, transport, holidays and leisure, clothing and social and cultural participation.

Emma Douglas, director of workplace savings & retirement at Aviva and PLSA chair, said 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.

“Record-levels of inflation mean the cost of retiring, as well as the cost of living, is at an all-time high,” she said. 

“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.”

Douglas argued that 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.

Aviva is calling on government to put a ‘roadmap’ in place now for how and when it will extend auto-enrolment to include:

  1. A reduction in the age that people can begin saving through auto-enrolment from 22 to 18 years.
  2. Phased abolition of the £6,240 lower earnings limit to make it easier for lower income and part-time workers to save for their retirement.

“The current AE system disproportionately disadvantages the youngest workers, part-time workers, and those with multiple lower-paid or part-time jobs,” she added.

“Removing the lower earnings limit could have the biggest impact on closing the gender pension gap, because it would mean women in a pension scheme would get a contribution from the first pound they earn.