The surprising numbers behind a comfortable retirement

James Rowe: Figures released over the last week show that we're still not saving enough for retirement. So is there anything we can do about it? Let's find out on this episode of Which? Money. Hello, it's James at home this week, but thankfully joining us down the line from the Which? studio, we've got Which? Money's pension expert, Paul Davies. Paul, how are you?

Paul Davies: Hello, I'm fine thanks, James.

James Rowe: And Calli Sullivan is from Pensions UK. Calli, hello?

Calli Sullivan: Hi, James.

James Rowe: Nice to have you both here. Now, Calli, for you at Pensions UK, you released this year's retirement living standards over the last week or so. These are the numbers that give us a bit of an idea into what retirement can look like. How was it for you last week? Is it always a bit of a busy but also exciting time of year?

Calli Sullivan: It's always exceptionally busy when we put out these figures. We get questions from the general public, the government, the industry, journalists. It's a very busy week for us but super exciting. I love being sort of in and amongst it all and that sort of buzz as the conversations are being had, and each year the messaging slightly adapts depending on what's going on, so it's always good to get straight in.

James Rowe: It's a bit of a safe space, isn't it, for us all to say we're actually excited by numbers about pensions and retirement? Paul, is it like for you when the press release landed? Is it a stressful or busy time for you – exciting as well?

Calli Sullivan: As you can imagine, it always depends on what sort of headlines are coming through, but the main thing for us is making sure that the messaging lands correctly. And we found that the messaging did really well – the messaging we wanted to get out about adequacy in retirement and better pensions for everybody. That messaging was put through, even if the headlines were slightly different to what we'd obviously show.

Act 2: Understanding the Retirement Living Standards

James Rowe: And what about it for you, Paul? How was it for you?

Paul Davies: I must admit, I messaged Calli on Tuesday morning to say it's that time of year. When are the new figures coming out? And she said, 'Well, if you wait about half an hour, you'll get the new figures via a press release.' So, yeah.

James Rowe: So you were keen. You were very keen.

Paul Davies: Well, I know it's early June normally, and we update so many of our guides. It feeds so much of our information and help for savers and pension savers that it's – yeah, it's a very useful piece of data that we use.

James Rowe: Calli, don't reveal the numbers just yet. We talk about the retirement living standards on the podcast quite often, and we always do a podcast around this time of year when the new numbers come out. But before you tell us what the new numbers are, do you want to just explain what they are and how you calculate them – how you get to the new figures every year?

Calli Sullivan: So the retirement living standards lays out three different lifestyles in retirement: minimum, moderate and comfortable. And the breakdown of those is Loughborough University puts some research together for us. They go out to discussion groups. They ask the discussion groups from all over the country, 'What do you expect to spend in retirement in these three different levels?' So they look at your household costs – so water bill and those sort of rates – your holidays and social life, food, transport, clothing and personal, and then there's a 'helping others' pot as well. So they'll go through each of those pots. They'll go room to room in the house: 'How many cushions have you got on the sofa?' depending on what living standards you're at. 'How many doormats do you own? What brand of tomato ketchup? What car do you want?' It literally goes through everything. These groups are huge, and they last for hours. So, have all those discussions, then Loughborough University go away with those numbers and cost them up. So the retirement living standards is not an income; it's not a target you need to reach. The figures represent how much is spent in retirement depending on which standard you're in. So that's the research behind it.

Act 3: Breaking Down the Numbers

James Rowe: And Paul, you mentioned these figures are quite essential for a lot of the online guides we write for the website and the magazine to help people understand planning for retirement. And I was reading some of them a little bit earlier on, and it shows how important they are because I think – is it nearly half of people don't actually know how much they'll need when they come to retire?

Paul Davies: Yeah, I think it was around 45% of people haven't got an idea. I must admit, we ran some focus groups about probably about a decade ago. So there were some big pension changes in 2015. It gave individuals much more control over what they did with their pension savings. And we asked lots of people about the changes and how they felt about their pensions. And the most common question was, 'How much do I need to retire?' It's a key question. People need to know the money that they're putting away means that they're on track for a comfortable retirement or a moderate retirement. So it's one of our most popular guides, and it's a subject we circle back to very often, as you know. It's something that we look at very frequently.

James Rowe: So should we get to the numbers then? How much will somebody need to retire? As you said, Calli, these are split into three distinct living standards, each with a monetary income depending on which threshold you would most ideally want to fall into, I guess?

Calli Sullivan: Yeah, of course. So there's three different levels, as I mentioned: the minimum, moderate and comfortable. But we also do how much is spent in a one-person household and how much is spent in a two-person household, because retirees, some are going into retirement alone, some are going in with partners. But also we've seen this increase of people actually living with family members and older children and things like that. So our standards, the two-person household, is based on a romantic couple, because as you can imagine, a romantic couple will have even more shared costs because they'd share a bed – just to clarify that. So the two-person household for the minimum, the spend is £22,500. For a moderate retirement, it's £45,400, and comfortable is £62,700. If you look at the one-person household, obviously it's not going to be a complete divide of that two-person, because a two-person household will still have costs individually as well, so it's not a complete in half. But the minimum for one person is £13,900, the moderate is £32,700, and comfortable is £45,400. And that's how much they spend on an annual basis.

James Rowe: And as you say, these figures, whether it's for a couple or whether it's for a single-person household, it's not exactly half or it's not double, depending on which way round you look at it. Paul, do you think people are aware that those numbers aren't exactly half or double? Because as you say, your electricity bill isn't going to be half if you're living alone, your council tax isn't going to be half, although it could be smaller. Do you think people are actively thinking about this when they're planning for retirement?

Paul Davies: Yeah, it's a good point, and I think I've probably had more queries on this question over the years. So I think the retirement living standards came in in 2019. So it's the most frequently asked question because people just assume that a single-person household will have roughly 50% of the overall spending of a couple household, but it is sort of two-thirds, three-quarters even, because of fixed costs – stuff like home insurance, broadband bills, energy bills will be the same whether there's one person or two people there. So single people have proportionally higher spending, which transfers through to the retirement living standards. So yeah, it's a key element to understand from the outset.

Act 4: Inflation and Cost Changes

James Rowe: And given you two are so well-versed in these numbers, how do they compare to last year? You do these figures on an annual basis at Pensions UK. Presumably, they've gone up compared to last year?

Calli Sullivan: Yeah, so they've increased, I would say, moderately from last year. I haven't got last year's figures, but I think it was somewhere along the lines of between sort of £400 and £1,400 depending on which level it was in. The increase in the figures this year was based on CPI numbers, so we have a bit of a routine on how the research is conducted. It's a four-year cycle. So in the first year, we strip everything back, we have the focus groups all back together, we start from scratch on the research: 'What have you got in your cupboards?' that sort of question. In year two, it's a CPI update. Year three, we have a smaller update similar to the first year where we go back out to a few discussion groups. Fourth year is CPI, and then fifth year – sorry, fifth year goes back to the beginning, so it's year one again. So we're currently in year four, which is the CPI, so next year will be that bigger update as well.

Paul Davies: I'm going to cheat here, Calli. I've written the numbers down in comparison to last year. So the moderate living standard, which is this year for a single person, £32,700 – so that's up by £1,000 on last year. So doing the maths quickly, that must have been £31,700 last year. And similarly for a couple, the new figure is £45,400, as we said earlier. So that's up by £1,500 compared to last year. So that must have been £43,900.

Calli Sullivan: Correct.

Paul Davies: So a significant jump, if not as big as some seen in previous years when inflation has been really high – so a significant increase on last year.

James Rowe: And it's a significant increase every year. If it's gone up by £1,000 or £1,500, that is every year that you will be in retirement. So if you calculate that across 20 years or 30 years or however long you want your money to last, that's going to be a significant increase in the actual size of your pension pot, isn't it, Paul?

Paul Davies: Yeah, I guess as the retirement living standards go up with inflation, so do your contributions. So if you're receiving a percentage of your salary into your pension, I guess your salary is going up each year by at least inflation, you'd hope, at most companies. So they do climb side by side. But yeah, the figures – we're going to go on to look at what that means in terms of starting saving at different age points – but they are quite chunky figures in terms of what you need to put away to meet the standard.

Calli Sullivan: It's one thing we always try and get through on some of our messaging when we're talking to the consumer is about the moment in time when you're looking at inflation, because when the research is done, inflation could be one figure, and when it comes out, it could be something else, and six months later it's something else. The importance of the retirement living standards is that it is – it's a starting point; it's a planning tool. It gives you a rough idea of what the costs are. Those sort of things do need to be taken into consideration when planning for your future.

Act 5: Housing Costs and Pension Poverty

James Rowe: And as you say, the numbers are guidelines – they're not an exact science – but they do go some way of explaining how the money might be broken down, as you mentioned before, for groceries or for holidays or for home improvements or that kind of thing. Is it right in saying that these numbers don't take into consideration mortgage costs or rent or anything like that?

Calli Sullivan: Yeah, that's correct. It's a question we do get asked quite a lot because a lot of people will be going into retirement with those housing costs now. But what we found is you've got so many different areas of the country that have so many different prices just in rent alone. You've got mortgage prices that are so different. You've got people who are going into retirement mortgage-free, those still renting. You've got people in social housing. You've even got people who enter retirement having paid their mortgage off, and maybe five, six years into retirement, big life change, and they're renting again, or they've got a new mortgage. You can't put a single figure to those differences. Alone, I think on regional renting costs, I think there's 1,700 different rental costs in the UK – and that's just rental, so taking out all the others. It's about individualising the retirement living standards for yourself. So have a look at the figures, but also if you are going into retirement with an extra cost that's not included, such as housing, that does need to be added as well and take that into consideration.

James Rowe: A few weeks ago on the podcast – might have just been a fortnight ago – we had Holly Lanyan from our money team on the podcast and we were talking about pension poverty. This was off the back of a Scottish Widows report about the amount of people who aren't even going to reach this minimum living standard threshold. I think it was about a third they calculated. Your numbers are a little bit different, I think, the percentage is a bit smaller, but still pretty bleak that there's going to be a sizeable proportion of us who currently aren't saving enough to reach that minimum threshold.

Calli Sullivan: So we've got at the minute, if you look at our figures, it's 82% of people will reach minimum, so there's obviously 18% of people who are not even going to reach the minimum in retirement. Your state pension will go towards those costs, so I think the state pension off the top of my head without having it written down is something like – it's around £12,500 a year at the moment.

James Rowe: I'm getting a nod from Paul. I can see the nod.

Paul Davies: Yeah, I think the full level of new state pension for this year is £12,548 from recollection, but not everyone gets that. It depends on your National Insurance history and whether you contracted out, but that's another podcast so I won't go into that right now.

James Rowe: Yeah.

Calli Sullivan: Yeah, so anybody who is going to be in receipt of the full state pension, that £12,548 –

Paul Davies: Eight something.

Calli Sullivan: – that will go towards the £13,900 on the minimum retirement to help with those costs. If you're going into retirement in a two-person household, the state pension alone covers your costs, just over. But there's still people who won't receive the state pension. There are one-person households who are going in who are still going to have to top up from that difference between them.

Act 6: Achieving the Targets and Saving Strategies

James Rowe: I'm glad you clarified that actually, because every time we talk about these numbers, I always think, do these numbers include the state pension? But it's good that we now have clarity on the fact that it does. And it obviously, for a lot of people who have saved enough and have those qualifying years, have that sort of buffer to give them that head start. But Paul, for the numbers and about where the rest of that money comes from, how much do you actually need in your pension pots to achieve some of these yearly incomes? Is this where we get to some of the pretty scary numbers?

Paul Davies: So the numbers are quite scary. So we'll start off with the moderate retirement living standard. So for a couple – and so this is to produce £45,400 – via drawdown it's between about £330,000 and around £390,000 if you're opting for drawdown. For an annuity, it's between £340,000 and £510,000. The top end of that range is for an annuity rate that's quite low, 5%. Annuity rates at the moment are between 7.5% and 7.8%, so your actual pot required is smaller via annuity, but that can change. Annuity rates fluctuate quite often. So, yeah, we're talking about, as you say, quite a hefty pot. Again, for single people, via drawdown between £330,000 and £385,000; annuity, £335,000 and £505,000. So again, there's a discrepancy between single people and couples. Not only do single people spend relatively more – so their retirement living standards look higher in proportion to a couple – the pot that they need to generate to provide money for these living standards is also high compared to a couple, because there's only one state pension included, whereas with a couple there's two state pensions. And also, you get a tax-free allowance whereby you pay no tax up to earnings of £12,570. Again, for a couple, that's doubled up. So there are two ways in which couples frankly have an advantage. So it feels like single-person households are really penalised in that extent.

James Rowe: And I guess that it – it sounds harsh that single-person households are penalised in that way, but I guess that's just one of the quirks of it, isn't it? It's just a – it's just a reality of kind of how these numbers add up and how these numbers work, isn't it?

Paul Davies: Yeah, there's not a lot you can do really. It's just if you're in a couple, you have greater tax benefits in some instances, and you're receiving two state pensions, which, as we've said, will cover the minimum costs. So any private pension above that level, you can add some of the more enjoyable things of life – sort of the trips, the foreign holidays, sort of the leisure spending, buying a new car every few years.

Calli Sullivan: It's also worth noting that it's quite comparative of the working world as well. So obviously pre-retirement, single people will have more costs than post-retirement. And what the retirement living standards also is hoping to sort of get across is the lifestyle you have pre-retirement is what you want to have at retirement. So if you're currently living a minimum lifestyle as a single person, that's what you're going to be aiming for and looking for at retirement. The same is if you're a couple at comfortable, you want to maintain your lifestyle going into retirement – you don't want it to change. The retirement living standards isn't about scrimping and saving, but it's also not about splurging either. It's about having a look at them and where you fit within them – what's your lifestyle now, and are you going to maintain that going in? A lot of people will probably reduce some of the costs they have during the working life into retirement. So your commuting costs, they're not going to be there anymore. Lunches in town when you go for a work meeting, they're not going to be there anymore. So costs do change, but the lifestyle itself is the important part – having a look at where you want to be and that continuation, so same with the single versus couple.

Paul Davies: Yeah, but a key point here is what you spend in retirement – that won't be linear. It may be – some people say that it's U-shaped in terms of spending – in that at the start of retirement, you might be travelling extensively. You might be passing money on to your kids still, so that's factored in. Whereas in the later stages of retirement, you might have care costs. You might be receiving care at home – there are other elements that come into play there. So we're talking about an average retirement of between 20 and 25 years, so your spending will fluctuate over that time. So again, these figures are a great guide to what you might be spending in those years, but it will ebb and flow over the course of retirement.

Act 7: The Future of Pensions

James Rowe: And given the numbers have gone up again this year, I guess it's two-pronged here, isn't it? There's potentially some policy changes which we may come onto from the government, but from an individual perspective, there's more of a need to save more and, ideally, save earlier – save as early as you can, Paul.

Paul Davies: Yeah, that's a bit of a mantra, actually – start saving when you can. It's much easier these days with auto-enrolment. So if you're over the age of 22 and earning above a certain level, you will be automatically enrolled into your workplace pension. So in the past, that may have been the case and you might have gone without private pension provision, but that's automatic now. You will pay in a minimum of 5% yourself, and your employer will pay in a minimum of 3%. You can pay in more, and your employer, if they're generous, will pay in more. So that's a great foundation; that's your starting point. If possible, you should never opt out of your pension scheme. It may seem at times that there are other priorities and you need to stop that contribution, but as I say, it's a great baseline, a great foundation to start building up a pension over the years. So, start early. If you're not in a workplace scheme – if you're self-employed, for example – you should still consider opening a pension as soon as you can and putting in significant contributions. But that's in an ideal world. You have to recognise that there will be other priorities as you move through your 20s and 30s – you might want to go out and have some fun on occasion.

James Rowe: Yeah.

Paul Davies: So it's a great goal to keep on contributing and put in as much as you can, but I guess there's a slight dose of realism there as well.

Calli Sullivan: Life changes quite significantly from your 20s to your 30s. Your priorities change, but I completely agree: if and when you can pay more, pay more. If you have to opt out for a period of time, don't forget about it – opt back in. Just don't forget, but I completely agree.

Paul Davies: Yeah, I must admit when my wife stopped work to have our kids, we stopped her contributions for a while because we had less income coming in, and we had all the additional expenses of having two young kids and what that meant. But as soon as she went back to work, we started contributing again. So this was prior to auto-enrolment, so it was voluntary whether you contribute to a pension. But yeah, life happens and there's a lot of demand on money to go elsewhere, but if you can, stay in a scheme. If you can contribute as much as possible, these scary numbers suddenly seem achievable and you will get help, hopefully to a good level from your employer and then via the government on pension tax relief.

James Rowe: Can I read you something from our website, Paul, that you wrote? And then you can –

Paul Davies: Oh no. Don't.

James Rowe: Now it's testing.

Paul Davies: Don't.

James Rowe: No, I just really – I really love the sentiment behind this. You wrote that, 'Telling someone that they should start saving earlier for retirement is a bit like saying you should eat your five-a-day. You'll probably agree with the sentiment, but might fall short in reality.' I guess that is a good way of looking at it, isn't it?

Paul Davies: Yeah, two or three a day is better than none a day. So exactly if you can, but again, I've been in that situation. I know when the bills are coming in and there's lots of draw on your income. But again, if you can put money into your pension – contributions, there's compound growth – hopefully if it's in a good scheme, you'll get investment growth. And it's quite nice to not look at it for a while, and then you might go online and look at your pension, and because it's well-invested and your company's putting money in, you might get a nice surprise. It doesn't all have to be doom and gloom in terms of feeling that you're falling short of these targets.

Calli Sullivan: Your future self will definitely thank you for those contributions, no matter how small they are at this stage in life.

James Rowe: And it is hard, isn't it? We talk about balance and the cost-of-living crisis that we're going through and money being pulled in all sorts of directions. But as you say, future you will definitely thank yourself if you can contribute a little bit more, and the benefits of compound will really pay off. There were some great numbers. Again, I was reading on the Which? website – we'll pop some links in the show notes so you can have a look at just how beneficial it is to save more and save earlier if you can. Calli, just to wrap up, obviously we talk about us doing a bit more, but also in reality, there's a push from a lot of places for the government to do more as well. We were talking about the pensions commission a couple of weeks ago, and they're looking at how we can save more through policy changes. At Pensions UK, you'd like to see some changes as well to help people save more for retirement?

Calli Sullivan: Yeah, it's really good to see that the pensions commission is considering things like the contribution level. As you said, automatic enrolment was a great starting point, but we're sort of 10 years down the line now and cost-of-living changes in that 10 years is obviously quite different. So it's great to see that the commission is looking at whether contribution rates can be increased to support the people who are not going to be meeting these retirement levels. And between government policy, the industry, the saver, if there's a way to be able to have that – what does an adequate retirement look like? Where is that line, and whether that's the minimum RLS – do we need to get everybody to – we should be getting everybody to at least the minimum. So, we're looking forward to seeing what comes out of the pensions commission, and whether that's an increase in contributions, it would be good to see.

Paul Davies: And we're talking about private pension and state pension – you've got some control over your private pension. We don't know what's going to happen with the state pension. The state pension age is going up, so you might have to wait for longer to get it. At the moment, it's got the triple lock guarantee, which means it goes up each year significantly. That might not last forever. So it's what you can control. So let's hope there is a substantial state pension going forward, but these things are yet to be decided.

Calli Sullivan: Yeah, and we want a system that works for everybody. There are people outside of the scope who are going to miss out – self-employed, under-pensioned. You mentioned earlier about your wife taking time out for kids; there's a lot of us who have done that as well, so we're going to miss out on certain things like that. So bringing everybody into a system that works for everybody to get that adequate, better pension would be great.

James Rowe: Oh, I feel like we've been on a bit of a rollercoaster today. We started with the fact that the numbers have gone up and it's not necessarily good news, and then we talked about saving a bit more and obviously the earlier we can save the better, and then we end with some more stark reality stats. Maybe we need to finish on a high note. Can either of you try and help us finish on a high note? Maybe some positives around saving for retirement? Please tell me you've got something positive.

Calli Sullivan: I think it's important not to look at these numbers and think they're too scary. They're figures that show the costs at retirement, but everybody's costs are different, and it's a starting point for that planning. Have a look at what you've got. I think there's this sort of process: have a look at these figures, have a look what you've got in your own pot, whereabouts are you? Have a chat with your employers. Some employers might match contribution levels, like you were saying. There are free sites out there that can help with where you are, are you on track? I don't think it should be all doom and gloom. Just take these figures as that early planning tool, and be able to sort of look at it from an individual level.

Paul Davies: Yeah, there's more conversations about pensions now. Not everyone knows all the detail and people won't look at their pension situation all the time, but you feel like there is that conversation going on, hopefully. And there's help out there from the government's service, Pension Wise, and MoneyHelper. And obviously, we at Which? have got lots of good content to help people.

James Rowe: We do indeed.

Paul Davies: I'd just encourage people to check their situation. At least if you've got an online pension, go online, make sure you access it once in a while just to engage with it. Or if you get paper statements, don't just chuck them in the bin – have a quick look. It's not going to be the priority all the time because it's pensions, and it's not something good on Netflix or going down the pub and having a couple of pints. But it's important – it's back to your future self – so it's just putting a little bit of time. You can still watch Rivals or whatever it is that's supposed to be really good – so people tell me – so I'll be doing that rather than looking at my pension statement over the weekend. But yeah, put some time aside, give it some consideration, and there's help. Lots of employers provide help for people in terms of sessions explaining how their pensions work. There's government assistance, and, yeah, obviously we at Which? have got lots of good content to help people.

James Rowe: We do indeed. I'll pop loads of links in the show notes to loads of useful advice, and I can't recommend enough the retirement planning newsletter that we've got. It sends you a weekly email with loads of advice in more of a manageable and bite-sized chunks. And we also did a four-part pensions podcast a couple of months ago – well worth a listen. But for now, for both of you, Paul and Calli, thanks very much for your time. Appreciate it.

Calli Sullivan: Thank you for having me.

Paul Davies: Thanks very much.

Outro

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