More than half of Brits are in the dark or ‘dangerously underestimating’ the minimum cost of retirement

How much you will need to live on when you retire is a question that can often lead to uncertain answers, and a recent study conduced by pension provider Pension Bee has found that it confuses many.

A pension pot of £250,000 or more is what is needed the pension firm said, to sustain a basic retirement longer than the 15-year average.

Yet fewer than half of the 1,000 adult respondents in the survey across the UK guessed that they would need around this amount.

Nearly a quarter or 23%  admitted they were unsure of the total pension pot size which is necessary to achieve their desired retirement income.

While 15% of those questioned said that their pension pot would need to be less than £150,000.

A further 14% who were asked came closer to the £250,000 mark, as they said that a pension fund of between £150,000 and £250,000 would be necessary.

According to the Pensions and Lifetime Savings Association’s (PLSA) Retirement Living Standards, a pension pot of around £150,000 would only cover what it regards to be a minimum retirement standard for around a decade.

A pension fund this size would pay for all basic needs, but also would leave little room for any extras or treats.

The figures from Pension Bee suggested that many are underestimating the true cost of retirement by some distance.

These sentiments risk a wider pension short fall, as the average timeframe of retirement is 15 years from the state pension retirement age of 66 alongside an average life expectancy of 81.

Generally there was also a clear lack of agreement among respondents regarding their desired annual income in retirement.

The top three responses said that around an annual income of £15,000 to £30,000, which includes the State Pension if eligible, and other benefits plus income from savings or investments would be required.

This falls short of the PLSA’s  ‘moderate’ standard, which calculates that retirees would see their annual food and clothing budget rise, in addition to paying for a two week holiday in Europe, and a long getaway weekend in the UK.

 

What you need to do to find out more about what you need for retirement

There are many steps that you can take to work out the income that you need in retirement.

  • Creating a budget would be a good place to start, dividing what you would need for essential spending such as household goods and groceries, and non-essential costs such as leisure activities, eating out or going for a drink at the local pub.
  • Working out what your retirement income is to be would be a good move, and you can start by getting a state pension forecast, which will give you an estimate of how much your state pension might be, based on your national insurance contributions.
  • If you have a defined benefit pension, that will pay you a guaranteed income which could depend on for example what your final salary was before retirement, then ask your provider what you might get.
  • Also for investors into a defined contribution pension scheme, you should receive an annual statement that shows how much is in your pot.
  • In retirement you could look to other ways to boost income to make your retirement more comfortable.
  • Going back into the workplace and taking a part-time job would be one way to increase your income in retirement.
  • There are plenty of websites where you can look at what is on offer for retirement jobs, such as from major online recruiters like Indeed.co.uk.
  • If you own any properties then you could receive rental income from a dwelling.
  • You could also rent a room in your house and have a lodger to create more revenue, or even consider selling up your current home and then downsizing.

If you have gone through some of these stages to check out exactly where your finances are, now you know how much income you might need in retirement and also noted how much you might get,  you can look to make a retirement plan.

Some questions you might want to ask yourself is are you looking to retire at a certain age, or gradually retire by reducing your hours.

It’s also important to estimate how much tax you would pay on your pension, as pensions are liable for tax once over the tax free personal allowance threshold, which is currently £12,570.