Putting a cost on retirement

£185.15 a week. That is what the new state pension will be after the increase due in April 2022.

By then, the uplift of 3.1% could be around half the going rate of inflation. Had the pension benefited from the temporarily abandoned Triple Lock, it would rise by 8.3%. Even with that increase the state pension would still not reach £200 a week, yet alone be enough to cover the frozen income tax personal allowance, equivalent to about £242 a week.

So, how much retirement income do you need?

The calculation of required retirement income has traditionally taken two forms:

• Proportion of final earnings This approach is the foundation on which final salary pension schemes were built. It assumes that your pension income before tax should be a fixed proportion of your earnings in the final year(s) of employment, The target fraction adopted by many pension schemes, both in the public and private sector, was two thirds.  

• Target living standard The final salary calculation is arbitrary: it assumes that both the chief executive and the lowest paid employee both need the same proportion of gross pay. In practice, for the chief executive, the formula may produce an excessive figure, particularly once tax is allowed for, whereas, at the opposite end of the scale, two thirds of not-very-much can be far-too-little. To counter this potential distortion, some retirement experts ignore pre-retirement income and consider a post-retirement question: how much net income is needed to meet a given standard of living? 

Neither method is designed to give as good an answer as an individual assessment based on personal expenditure. However, they provide a helpful starting point for generalised calculations. 

The Pensions and Lifetime Savings Association (PLSA) basis

In 2019, the PLSA joined with Loughborough University to develop a table of target retirement incomes based on three different living standards: 

• Minimum, a level of income which covered all needs, with ‘some left over for fun’;

• Moderate, a higher level of income, providing more financial security and flexibility; and

• Comfortable, the top level of income, giving more financial freedom and ‘some luxuries’. 

The PLSA considers six categories under each standard. For example, under the Transport category, the minimum standard makes no provision for a car, while the comfortable standard envisages a couple having two cars, each replaced every five years. 

The latest results

Towards the end of 2021, the PSLA updated its tables, taking account of how prices and spending habits had changed since 2019. For example, a Netflix subscription was added to the minimum and moderate standards while the comfortable standard saw the inclusion of annual maintenance and servicing of a burglar alarm. The net annual income numbers are shown below: 

Unless you aspire only to the minimum standard of living, the state pension will leave you with a significant shortfall. At the comfortable end of the retirement spectrum, tax can push up gross income requirements to high levels. If a couple living outside London are relying upon the income of only one spouse or civil partner, then he or she will need gross income of nearly £62,000 to reach the net income goal of £49,700.

A later state pension?

In mid-December the Government announced a review of state pension age (SPA), primarily focused on when this should rise to 68. At present, the SPA is 66 and is due to increase to age 67 between April 2026 and April 2028. Five years ago, the Cridland Report proposed that a SPA of 68 should be phased in between 2037 and 2039. Since that report, improvements in life expectancy have been less than forecast, which would point to the next but one (and possibly even the next) SPA increase being deferred. However, the Treasury would not be happy with any such move, given the extra outlay involved. Whether mortality trumps money should be clear by early May.