The Retirement Living Standards – Is there a funding gap?
The Retirement Living Standards are a fantastic introduction to income needs in retirement, but anyone who targeted these in previous years may find they now have a funding gap as the levels have increased considerably. This is likely to be more prevalent for employees in their workplace pension.
Background
In January 2023, the Pensions and Lifetime Savings Association (PLSA) announced their new 2022 Retirement Living Standards. They created these living standards to help people picture what kind of lifestyle they could have in retirement.
Retirement living standards table
Source: Pension and Lifetime Savings Association, January 2023 https://www.retirementlivingstandards.org.uk/
The standards show what life in retirement looks like at three different levels, Minimum, Moderate and Comfortable living which you can see along the top, and what a range of common goods and services would cost for each level which you can see underneath. They’ve further split this down in to values for singles and couples, and for living in or outside London. What you’re looking at here are the figures for couples who live outside London.
Now this is of course a very rough average and you, as a financial adviser, would be looking at your client’s individual needs and objectives. But perhaps you’ve used these at an initial client meeting, or you have these on your company website or you’ve used these with employees in workplace pensions.
For a complete list of all the retirement living standards for both singles and couples, living inside or outside London, we’ve provided them in the following table.
| Level | Location | Amount (Single) | Amount (Couple) |
|---|---|---|---|
| Minimum | Ex London | £12,800 | £19,900 |
| London | £14,300 | £22,400 | |
| Moderate | Ex London | £23,300 | £34,000 |
| London | £28,300 | £41,400 | |
| Comfortable | Ex London | £37,300 | £54,500 |
| London | £40,900 | £56,500 |
As you would expect, the levels have increased considerably from the equivalent figures in 2021. Domestic fuel and food price increases significantly impacted the levels. For example, the minimum level for singles outside London increased over 17% (from £10,900 in 2021 to £12,800 in 2022), the moderate level increased by over 12% (from £20,800 to £23,300), and the comfortable level increased by over 11% (from £33,600 to £37,300).
Thankfully for many, their basic income needs will mostly be met if they receive the full new State pension which in 2023/24 is £10,636.60. Checking the government’s website (opens in a new window) will explain how much they’ll receive, and perhaps if they know the minimum retirement living standards will be met, may encourage them to target a higher income and save more in to their pension.
However, despite the State pension increasing by 10.1% in April 2023, the gap between the new State pension and each of the retirement living standards levels has increased. If we consider the standards for singles outside London, the figures are:
| Level | Year | Amount | New State Pension | Shortfall | Percentage increase |
|---|---|---|---|---|---|
| Minimum | 2021 | £10,900 | £9,660.86 | £1,239.14 | 74.6% |
| 2022 | £12,800 | £10,636.60 | £2,163.40 | ||
| Moderate | 2021 | £20,800 | £9,660.86 | £11,139.14 | 13.7% |
| 2022 | £23,300 | £10636.60 | £12,663.40 | ||
| Comfortable | 2021 | £33,600 | £9,660.86 | £23,939.14 | 11.4% |
| 2022 | £37,300 | £10,636.60 | £26,663.40 |
For the minimum level the shortfall from the new State pension to the target level has increased by almost 75%, moderate almost 14% and comfortable over 11%.
This means any individual who had been targeting the standards in 2021 will have a funding gap based on the new 2022 standards and will need to revisit their retirement planning.
If someone has a considerable time before their State pension age then the impact on their contributions will be limited but if they have a short period to go, their contributions will need to increase considerably.
For example, the minimum retirement living standard difference between 2021 and 2022 is £924.26, therefore the additional fund required would be £17,590*. For moderate the difference is £1,524.26 and the fund required would be £29,600*, and for comfortable the difference is £2,724.26 and the fund required would be £52,900*.
For an individual with 25 years to go to State pension age, if we assume a growth rate after charges of 5% per annum, the individual targeting the minimum retirement living standard would need to increase monthly contributions by £30. If someone targets the moderate, they would need to pay an extra £50 per month, and for comfortable an extra £90 per month.
However, if someone only has 10 years to go, and if we again assume a growth rate after charges of 5% per annum, the individual targeting the minimum retirement living standard would need to increase their monthly contributions by £115. If someone targets the moderate, they would need to pay £190 per month, and for comfortable it’s £340 per month.
Their alternative is, if they can, work for longer, or target a lower income. Your clients will no doubt have a bespoke plan with a target income in retirement in mind, but where this may be more relevant is for employees in workplace schemes who may be unaware of their funding gap and will need help to put their retirement plans back on track.
* Assumption: the best annuity rate from Hargreaves Lansdown for a 66 year old, single life, 5 year guarantee, 3% escalation, on 18th August 2023 the rate was £5,150.16 per £100,000.