The Looming Retirement Crisis: Are You Prepared?
Across the United Kingdom, a significant portion of the population faces the daunting prospect of financial hardship in retirement. Many individuals are finding that their pension provisions and savings are simply not sufficient to meet their needs in later life, forcing them to contemplate drastic cutbacks.
New research indicates that two in five adults across the UK are on track to struggle to cover their basic living expenses once they stop working. In certain regions, this figure rises alarmingly to nearly half of the population. This paints a concerning picture of widespread potential retirement poverty.
Analysing a range of data points, a leading pension provider and a financial consultancy have assessed how the average projected annual pension income compares to the cost of a ‘basic’ retirement in different areas of the country. This assessment takes into account both the state pension and any private or workplace pension savings.
According to the Pension and Lifetime Savings Association, a basic retirement, covering essential needs only, costs £13,400 per year for a single person and £21,600 for a couple, excluding London.
Regions at Highest Risk
The research highlights that pensioners in the North East of England and Northern Ireland are most vulnerable, with a staggering 48% at risk of not meeting the minimum financial requirements for a basic standard of living in retirement. This means nearly half the retirees in these regions could face significant financial difficulties.
Other areas where a substantial proportion of pensioners are at high risk include:
- South West England: 46% at risk
- Wales: 44% at risk
- West Midlands: 42% at risk
- London and North West: 41% at risk in each region
- Scotland: 39% at risk
- East Midlands: 36% at risk
- Yorkshire and the Humber, and South East: 34% at risk in each region
Even in the East of England, which fares relatively better than other regions, a concerning 32% of people are still likely to face financial hardship in retirement, meaning that one in three people could be unable to afford a minimum standard of living.
Understanding Retirement Living Costs
The amount of money needed for a comfortable or even moderate retirement has increased significantly in recent years, making a pleasant retirement lifestyle unattainable for many.
According to the Pension and Lifetime Savings Association, the annual costs for different retirement lifestyles are:
- Moderate Lifestyle (Single): £31,700
- Comfortable Lifestyle (Single): £43,900
- Basic Lifestyle (Single): £13,400
- Comfortable Lifestyle (Couple): £60,600
- Moderate Lifestyle (Couple): £43,900
- Basic Lifestyle (Couple): £21,600
A moderate lifestyle provides for essentials plus some additional spending on food, entertainment, and the running of a car. A comfortable lifestyle allows for luxuries such as a two-week holiday abroad and increased spending on clothing and meals out.
The cost of a basic lifestyle has decreased slightly this year due to lower energy bills. The full, new state pension of £11,973 can cover a large portion of this, meaning a small private pension income can be enough to achieve a basic lifestyle. However, this remains a challenge for those without a private or workplace pension, or those who do not qualify for the full state pension.
A couple both receiving the full state pension could achieve a basic lifestyle without any private pension income.
Taking Action to Secure Your Future
It is crucial to take steps to mitigate the risk of an underfunded retirement. Experts emphasize that even small savings efforts now can make a significant difference in the long run.
Here are some proactive measures you can take:
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Maximise Employer Contributions: If you have a workplace pension, ensure you are contributing enough to take full advantage of employer contributions. Typically, if you contribute 5% of your salary, your employer will contribute at least 3%. Some employers may even match your contributions up to a certain amount.
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Track Down Lost Pension Pots: Many people have unclaimed or inactive pension pots from previous employment. Contact former employers or use free online services or apps to locate these lost pensions. Currently, an estimated £31.1 billion is sitting in unclaimed pension pots, which could significantly boost your retirement savings.
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Consider Delaying Your State Pension: If you can continue working beyond the state pension age, delaying your claim can increase the amount you eventually receive. Your payments are boosted by 5.8% for each year you delay. While this could result in a substantial increase in your total pension income if you live a long life, it is important to consider your health and life expectancy.
Addressing the potential retirement crisis requires a collective effort to empower individuals with the tools and information they need to make informed decisions about their future, regardless of their location. Small steps taken now can significantly improve your financial security in retirement.