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Couples need to save £600,000 for retirement

Written by on 5 May, 2010

New figures released last month have revealed that couples need to budget almost £600,000 in order to cover the cost of their retirement. The research, from MGM Advantage, causes concern for workers because it means that each pensioner needs an income which is more than double the basic state pension purely to cover the cost of necessities such as food, clothes and petrol.

A combination of increases in living costs and falling incomes from pensions means that retiring workers are set to struggle without saving, as annual expenditure has risen by a third in the last five years.

The latest report shows that, assuming a couple will be in retirement for twenty years, an average household would need to have stowed away £564,227 in order to cover costs. The numbers reflect the estimated annual household expenditure for couples aged 65 to 74, and those who are 75 and over. The former age group are likely to spend £23,107 per year while the latter would spend £14,926 a year on everyday living costs. This is compared to five years ago where figures were £17,737 and £11,700 respectively, a substantial increase.

There are of course regional differences in living costs which affect pensioners; the report found that Londoners as expected are hit hardest, with a retired couple needing £668,553 to last them twenty years in the capital without working. Their counterparts living in the North East would need a still hefty but lower £473,178 to cover twenty years of living in retirement. The compilers of the report have suggested that this may lead to couples planning on retiring to a cheaper region in order to save money, as annuity rates fall and costs rise.

Due to the recession and longer life expectancy, pension incomes have declined meaning that a pension of £564,227 currently brings an annual income of £35,806, almost £2,000 less than it would five years ago. Those who are wealthy or who work in the public sector and can rely on a good pension scheme are less affected than those who would have to live on a basic state pension, which would bring in only £10,155 per year for a retired couple – a very basic £97.65 a week.

Money problems for older generations do not end there; a recent report by equity release specialists Key Retirement Solutions showed that pensioners are starting off their retirement with average debts of £36,000 from costs such as loans and mortgages. New research by the financial services group, MetLife Europe, has found further disturbing figures: pensioners have to pay back a third of their income in tax, pushing them even more into poverty. A typical retired household that has an income of £17,727 is paying back £5,315 in direct and indirect tax. The largest part of the loss is going straight to HM Revenue & Customs, for income tax which will cost a pensioner almost £1,500, and another sizeable chunk goes to VAT, averaging £1,229 a year.

Despite misconceptions that tax stops when you finish working, the report shows that it must be considered when planning for retirement funds. Pensioners who are less well off than the average household are paying even higher proportions of their income to tax costs, giving 40% over to HM Revenue & Customs. Around 16.6% is also paid out on indirect taxes, including alcohol, petrol and TV licences.

The news comes after a long line of reports into the state of pensions and workers. Recently the National Association of Pension Funds (NAPF) found that only one third of workers believe that their pension will provide them with enough money to live on when they retire – which, after this latest report, suggests that most people are realistic in knowing what they need but will struggle when it comes to giving up work.

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