When you sit down with your financial planner, one of the things they’ll want to establish is the kind of retirement you’d like. They can then start to determine how much you’ll need to invest to achieve it and whether you'll need to make any adjustments to your current lifestyle.

Many see retirement as a chance to spend more time with friends and family, start a new hobby, explore the local area and / or travel abroad. For others, retirement could mean a complete lifestyle change.

The cost of retirement will vary from person to person, because we all have different goals and circumstances. But whatever future you envisage, it’s important to crunch the numbers, get a plan together and make any necessary adjustments early on. Otherwise, you might risk leaving it too late to afford the retirement lifestyle you want.

This article was updated March 2024.

Couples wanting a ‘comfortable’ retirement need an annual income of £59,000

How much do people spend in retirement?

In 2022, a survey by Which? revealed that the average retired couple spent just under £2,340 each month, requiring an annual net income of £28,000. At the time, Which? considered this enough for a ‘comfortable’ retirement (covering the necessities plus a few luxuries).

But that’s all changed. Since then, the cost of living, thanks to food inflation and energy bills, has soared. This, coupled with higher expectations of what retirement looks like, has impacted the amount financial experts now say it will cost.

According to a more recent study by the Centre for Research in Social Policy at Loughborough University, the yearly income needed for a single person to achieve even a ‘moderate’ lifestyle in retirement is now £31,300. And those hoping for a more ‘comfortable’ retirement would need an income of £59,000 per couple – more than double the amount Which? reported back in 2022.

It’s no surprise then, that couples who rely on the state pension to fund their retirement will struggle to make ends meet. The study found that even with the 8.5% increase to the state pension in April 2024, a single person will still be £3,000 short of covering even the basics.

Post pandemic has fuelled the desire to ‘get out more’

Unsurprisingly, the restrictions we were all placed under during the Pandemic resulted in a change in attitudes and behaviours, particularly in terms of how we spend our leisure time. Professor Matt Padley, co-director of the research centre at Loughborough University explains, “Following the COVID pandemic, this latest research highlights a pronounced need and enthusiasm among the public for shared experiences beyond the confines of their homes, including activities like eating out and holidays,”

The extra cost of socialising outside of the home, coupled with the rising cost of living, compounds the reasons why we all need to save a lot more for our retirement compared to just two years ago.

How can I calculate how much I’ll need in retirement?

One of the most obvious considerations is how long you expect your retirement to last (or, put simply, your life expectancy). Based on the average life expectancy in the UK, a 65-year-old today can expect to live to age 85 (for males) or 87 years (for females). There’s even a 1-in-4 chance of living a further seven years beyond that.

Within those timeframes, you’ll need to consider your incoming bills and what you’d expect to spend each month on things like groceries, travel, holidays, clothes, leisure activities, etc.

You can exclude the things you won’t have to pay for when you retire – usually things like childcare, a mortgage, life insurance, critical illness cover, commuting costs, and pension contributions.

Taking it a step further, you might consider what falls under ‘essential’ spending and what you consider ‘lifestyle’ expenditure (ie. the things you wouldn’t want to give up), then calculate the minimum and maximum you’ll need each month. Then it’s time to dream a little: if money was no object, what would you choose to do in retirement?

  • Essentials: Utilities, groceries, household maintenance, insurance, healthcare, clothing and transport
  • Lifestyle: Holidays, dining out, designer clothes, redecorating, a new car, hobbies, recreational and leisure activities
  • Luxuries: Buying a holiday home, funding your grandkids’ education, paying off your children’s mortgage

Remember to factor in the cost of replacing large household items every few years, too. Household appliances, boilers, sofas, and furniture… they won’t stop ‘wearing out’ just because you’ve retired.

Coming up with an accurate figure is not straightforward, plus there are other factors that are often difficult to calculate (for example, the impact of unexpected life changes, stock market performance, and so on). A financial planner can ‘model’ this for you, and help you create a plan to help you achieve your retirement goals.

Multiple pension pots

For most people, retirement income will come from a pension they’ve held over the medium to long term (either through their employer or privately). There’s also the state pension, which is currently £221.20 per week or £11,502.40 a year, an increase of £1,874.60 than two years ago.

– Your State Pension
From April 2024, the full state pension will be £221.20 per week, or £11,502.40 a year, an increase of £1,874.60 than two years ago.

To claim the full amount, you must have made 35 years of National Insurance (NI) contributions by the time you’re eligible to receive your state pension. That’s currently 66 years old but will rise to 67 in 2026 (and later, 68), depending on the year you were born.

Many people, especially women who took time out of the workplace to raise a family, don’t realise they may not be entitled to the full amount. To check your state pension forecast, go to https://www.gov.uk/check-state-pension

But as we said earlier, even if you can claim the full amount, you must top up your income with a private or workplace pension to enjoy a ‘comfortable’ or even ‘moderate’ retirement.

– Defined contribution and workplace pensions
If you’re an employee over 21, your employer will have registered you for a workplace pension, which they’ve been mandated to provide since 2012. Provided you didn’t choose to opt-out, your employer will contribute a minimum of 3% of your pay to your pension, and you’ll contribute a minimum of 5%.

These types of workplace pensions are known as ‘defined contribution’ pensions, which means the size of your pension pot is based on how much you’ve put into it. You can also arrange a private defined contribution pension (separate from your employer).

– A defined benefit pension
You might be lucky enough to have a defined benefit or ‘final salary’ pension. This type of workplace pension is increasingly rare and is more common among people who work in public sector jobs, like health and education. Instead of building up a pension pot over time, it provides you with a guaranteed annual income for life based on your final or average salary.

A financial planner can provide best and worst-case retirement projections based on your current pension pot and the age you want to retire

Managing multiple pensions

If you’ve had several jobs over the years, it’s likely you’ll have more than one pension. You may also have one or more private pensions.

In these cases, some people choose to consolidate some, or all of their pensions into a single pot. This can often save on fees, allow you to keep a closer eye on investment performance, and make changes more easily, where needed. However, it’s essential to seek professional advice before consolidating your pensions – especially if you have a defined benefit pension. You may lose important benefits if you transfer your money.

A financial planner can provide best and worst-case retirement projections based on your current pension

How much more do I need to contribute each month?

A financial planner can provide best and worst-case retirement projections based on your current pension pot, the age you want to retire and the plans you have for retirement. Once you know how much your pension pot is worth, they’ll calculate how much more you need to contribute each month to afford your ideal retirement.

Life can be expensive, especially if you have young children and a large mortgage. You might not be able to save as much as you need right now, but as your children get older and your career progresses, you can increase your contributions over the years. It’s worth remembering, though, that time is your friend when it comes to pension saving. So the earlier you begin, the better.

It’s also important to remember that pensions are a type of investment. Their value can go down as well as up, and you may not get back the full amount you invest.

Pension tax relief

Pensions are a tax-efficient way to save for retirement because your pension contributions are tax-free. If you’re a basic rate taxpayer, you’ll receive 20% pension tax relief on your pension contributions up to £60,000 per year. You can claim 40% tax relief if you’re a higher-rate taxpayer.

Pension tax relief is calculated slightly differently in Scotland – you can find out more at https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Phasing your retirement

Many people choose to keep working beyond retirement age, or phase their entry into retirement by working part-time, enabling them to leave part of their pension invested. Phasing your retirement is a good way of making your pension pot go further and last longer.

For more on phased retirement, see Is ’phased retirement’ right for you?

Amber River Financial Planning

A pension is arguably the most important life event you need to save for. The earlier you start, the less you need to contribute because your savings will benefit from the effects of compound growth over the years.

But even if you’ve left it late, it’s not too late to start contributing. Speak to one of our pension planning experts, who will help you implement a plan that will allow you to achieve the retirement you want.

Get in touch

If you would like to check whether your pension savings are on track, speak to an Amber River Independent Financial Adviser. To set up an initial appointment, call 0800 915 0000, or alternatively use our contact form here.