The Garrulous Jay – Great Expectations

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It’s not every day that pensions make the BBC 10 O’clock News, so you can imagine my excitement when Dharshini David popped up on Wednesday evening with a piece about the cost of retirement. She was reporting on the latest Retirement Living Standards report published by the Pensions and Lifetime Savings Association.

This study quantifies the cost of retirement by asking the public about their expenditure expectations in later life, from which three Retirement Living Standards (RLS) are derived.

From this analysis conclusions can be drawn about the realism of people’s expectations in terms of whether their accumulated savings will be sufficient to meet their aspirations.

The 2023 report showed some particularly pronounced changes for the so-called Moderate RLS, where the cost of meeting the expectations increased by 26.7% for a retired couple. A couple seeking to enjoy the Moderate RLS would now need £43,100 per annum, up from £34,000 last year. This increase makes underlying inflation look positively puny by comparison.

As the report explains, “Aside from higher food, household energy and motoring costs adding disproportionally to the cost, this level also saw changes in the expectations of what should be included at this level. For example, the in-depth discussion groups considered that at the Moderate level people should be able to help their family members financially with a budget of £1,000…as well as an additional £100 per month to take family members out for a meal.”

What lessons can we draw from this?

First, as Nigel Peaple of the PLSA states, “a couple who each has a full entitlement to the State Pension will achieve the Minimum level, and if each is paid average earnings throughout their working life, they have a good chance of enjoying many aspects of the Moderate living standard”.

Good chance..? Many aspects..? It hardly fills one with confidence. But that’s the point: too many people either have misplaced expectations of the lifestyle they will be able to enjoy in retirement, or they need to materially increase the amount they are saving or adjust their expectations as to when they’ll be able to retire.

According to the ONS, a male age 50 today has a 1-in-4 chance of living to 93. The figure for a female is 95. If both were to retire at current State Pension Age of 67, their 1-in-4 life expectancy would be an average 27 years. That equates to total spending of £1.16 million at the Moderate RLS.

Even allowing for an investment return of 4% per annum, this would require a pension pot of over £700,000.

There also appears to be one glaring omission in the report, and that’s the cost of later life care which, in many areas, is already double the Moderate RLS for a single individual.

Taking all of the above together, however questionable the underlying research is – it involved just 135 people in 14 discussion groups – the report serves as another timely reminder of the importance of saving for later life.