If you’re worried you won’t have enough in your pension pot to live on once you reach retirement age, you’re not the only one. An extra 1.2 million people are not on track for even a minimum retirement lifestyle, according to the latest Scottish Widows annual retirement report.
It might be tempting to bury your head in the sand, but whether you are nearing retirement age or just starting out paying into a pension, it’s crucial to ask yourself: ‘Will I have enough money for my retirement?’
The answer will hinge on several factors, including your lifestyle preferences, personal goals, and economic considerations such as the cost of living.
The rising cost of living
Over the past few years, UK households have faced a perfect storm of price increases and tax adjustments, such as:
- Energy Prices: Despite the energy price cap falling to £1,690 per year for the average household in April 2024, this figure remains double what it was just a couple of years ago.
- Food Price Inflation: Grocery bills have surged, costing an extra £10 per week for the average family.
- Council Tax Rises: Households are paying approximately £100 more annually due to council tax increases.
- Interest Rate Rises: Mortgage costs have risen significantly due to interest rate hikes.
Although some Government Financial Support measures assist people retiring, they often cover only a fraction of the overall cost and are limited to low-income households.
Retirement living standards
To work out if you can afford your desired standard of living in retirement, it can help to use the Retirement Living Standards provided by the Pensions and Lifetime Savings Association (PLSA). The PLSA outlines three levels of living and what they cost:
- Minimum Level – Covers essential needs with some left over for fun:
- Single Person: £14,400 per year
- Couple: £22,400 per year
- Moderate Level – Offers more financial security and flexibility:
- Single Person: £31,300 per year
- Couple: £43,100 per year
- Comfortable Level – Provides financial freedom and some luxuries:
- Single Person: £43,100 per year
- Couple: £59,000 per year
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Saving for retirement in the UK can be challenging, especially with the rising cost of living. Here are some tips for increasing your pension pot:
- Start early: Time is your greatest ally. Begin saving early to harness the magic of compound interest (where you earn interest on interest!). The “half your age” rule of thumb says that when you first start to save for retirement, you should save a percentage of your pre-tax salary equal to half your age. So, if you get your first full time job and start contributing to a pension at 22, you should put 11 per cent of your salary into your pension.
- Regularly review your budget: Track expenses and identify areas to cut back. Allocate the saved funds to retirement savings – even small amounts add up, especially over time.
- Build an emergency fund: Aim for at least three to six months’ worth of living costs in an easy access account.
- Diversify investments: Don’t rely solely on one investment type. Diversify across stocks, bonds, and other assets.
- Maximise pension contributions: Contribute the maximum amount you can afford to your pension pot.
- Consider ISAs: Utilise Individual Savings Accounts (ISAs) alongside your pension for tax-free growth.
- Delay retirement if possible: Consider working a few extra years which can significantly enhance your retirement savings.
There’s a lot you can do to make the most of your own retirement savings, and the more proactive you are the better. If you have a decent amount in your pension pot (as you will need to consider fees), it might be worth seeking the advice of a financial planner. They can help you with saving and investment strategies to bolster your pot even further.
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