Coronavirus pushes retirees to cut back on spending: how much will you need to retire now?

Retired consumers are spending less due to the impact of coronavirus, new Which? research has found.

Our annual cost of retirement survey, which gathers thousands of responses from retired individuals and couples, revealed travel and recreation costs saw the biggest decline.

The latest report also reveals exactly how much you'll need to produce in terms of retirement income to make sure you have a happy and comfortable time in later life.

The COVID-19 effect

A survey of 6,300 Which? members in June revealed that overall spending is down 5% on last year.

The areas with the biggest cutbacks are those hardest hit by the impact of the coronavirus pandemic.

Recreation and leisure spending was down by 13% for couples. They also spent 6% less on both European holidays and transport.

However, couples are still spending just as much on groceries and utilities.

Single retirees spent 21% less on extended or long-haul holidays and 10% less on Europeans excursions. Expenditure on recreation and leisure (-14%) and transport (-9%) was also substantially down.

• Find out more:retirement spending levels for couples and individuals

How much do you need to retire?

New analysis by the consumer champion also shows that retired couples need an average income of £17,000 a year to cover spending on essentials - such as groceries and bills. This is down from £18,000 in 2019.

The figure rises to £25,000 when including more spending on leisure activities (compared to £27,000 in 2019) and up to £40,000 a year after tax for those looking to live a 'luxury' lifestyle (including long-haul holidays and a regular new car) - down from £42,000 last year.

Single-person households spend an average of around 70-75% of the outlay of two-person households, but only benefit from roughly half of the state pension entitlement and tax-free allowance of a couple.

This puts the income targets for essential, comfortable and luxury spending for single retirees at £12,000 (vs £13,000 in 2019), £19,000 (vs £20,000 ) and £30,000 (vs £33,000), respectively.

• Find out more:how much will you need to retire?

Building up your pension pot

Our calculations show that once the state pension is factored in, couples will need a gross annual income of £3,040 from private pensions to achieve the 'essential' net income target, rising to £11,040 for a comfortable retirement and £29,790 for a luxury one.

For single-person households, that equates to private pension income of £5,020, £13,635 and £27,395, respectively.

To be able to generate the income you think you will need later in life you need to hit a savings target, which can vary depending on whether you opt for a pension drawdown or an annuity.

Couples relying on income from a defined contribution pension (plus the state pension) would need a pot of just over £169,000 to achieve a comfortable retirement if opting for pension drawdown (assuming growth of 3% a year), or £262,500 for a joint-life annuity paying 50% to a surviving spouse.

The figures for gross annual income required (£3,040, £11,040 and £29,790) assume a couple receive an annual state pension of £13,962 and an individual gets £6,981. Tax-free personal allowances of £25,000 (couple) and £12,500 (individual) apply before tax is deducted.

• Find out more:check if your retirement saving is on track

Pension funds fall in value

Separate Which? research from June found that more than half of people yet to retire reported that they are worried about their pensions falling in value, while a quarter of those who are already retired are now concerned about making their pension savings last.

Those who are already generating retirement income via their own investments, including pension drawdown, are more exposed to the economic turbulence seen over the past few months.

Which? advises that the best way to minimise the risk of selling at a loss, and potentially running out of money in retirement, is to avoid cashing in your investments as far as possible during this period, giving the markets the chance to rebound. Instead, turn to other income sources if possible, such as cash savings.

Jenny Ross, Which? Money editor, says: 'The results of our survey provide a detailed picture of the spending habits of people in retirement, which should provide those preparing for it with a better idea about how much they'll need in their pension pots.

'Perhaps unsurprisingly, the impact of coronavirus has seen retirees cut back on their spending in areas such as travel and leisure this year, and there is clearly concern about how the economic instability may affect people's savings.

'If you're yet to retire, think very carefully about reducing your pension contributions or opting out altogether, as this could set back your retirement plans.

• Find out more:how coronavirus is impacting pensions and investments