How much more do you need to retire with the rising cost of living?

The cost-of-living crisis affects the whole country, and it means that in real terms your money is worth less now than it was a year ago. But what might this mean for your retirement, and do you need to save more money to enjoy the same standard of living as you might had a year ago?

The cost-of-living crisis refers to the fall in real disposable income (income adjusted for inflation after tax and benefits) that the UK has experience since 2021. It is therefore mostly impacted by inflation and the most recent figures for May 2023 indicate that inflation is at 8.7%. This, of course, will have an impact on your pension provisions and how much you should be saving for retirement.

Why is there a cost-of-living crisis?

It’s important to understand what has caused this cost-of-living crisis before we look at the impact it will have on pensions. Briefly, it is a mix of different factors that have occurred over the past few years. For example, cost pressures, impacts from the pandemic, disruption to the global supply chain and, most notably, the Russian invasion of Ukraine.

These factors have caused prices to shoot-up as demand stays the same or increases, but supply contracts. The good news is that the cost-of-living crisis is projected to ease by 2024; but the impact that it has had on pension provisions is not something to underestimate.

What it means for your pensions

Put simply, your pension pot will be worth less in real terms now than it was, for instance, 3 years ago. According to the Retirement Living Standards Association (RLSA) “retirees trying to achieve a basic standard of living will have seen their expenditure increase over the last year by almost 20% due to high inflation”. In our previous article on Average Retirement Income we detailed the tables that are supplied by the RLSA but didn’t show the change since 2022.


This table illustrates the added pressure on finances during retirement with a £1,900, or 18%, increase in the Minimum lifestyle in retirement to a £3,700, or 11%, increase in the Comfortable lifestyle in retirement living standard.

The full new State Pension is now £203.85 per week, or £10,600.20 per annum, an increase of 10.1% on its previous amount of £9,627.80. We can see that the State Pension hasn’t increased in line with the minimum lifestyle in retirement increase and therefore the reliance on private pensions to “plug this gap” will be more pronounced.

If you are aiming for a moderate lifestyle in retirement, you would require an income of around £34,000, as per the table above, if you are a couple living outside of London. This would mean that, if you both receive the full state pension, you would need to be able to fund £12,799.60 extra per year to meet your income requirements. If we were to use the 2021 income of £30,600 and £9,627.80 state pension for each, you would have only needed to be able to fund an extra £11,344.40 per annum; an increase of 12.8%.

We looked at this in a different way in our previous article 'What is a good pension pot?' where we explained that a healthy 65-year-old is likely to need a pension pot worth approximately £280,000. This meant that pensioners could take their 25% tax-free lump sum and receive a yearly income of £17,200 for fifteen years. The Department for Work & Pensions now puts the average pension income at £349 per week, or £18,148 per annum; an increase of 5.51%. This shows that more money is being received by pensioners, whether from an increase in index linked annuities or a higher amount being drawn from private pensions due to the increase cost of living.

What this all means for your pensions is that more savings are required in order to help sustain you throughout your retirement. Alternatively, it might be appropriate for more risk to be taken within the underlying investments in your pensions; however, we would not recommend you do this without first seeking financial advice.

What it means for your retirement

We can clearly see an increase in the need to save before retirement, whether it is extra pension provisions or savings held in different wrappers, such as ISAs, investments or just cash savings; although the latter would be impacted by inflation. You may find that you need to increase the actual amount you’re saving or perhaps work longer, in fact, it was found that there were almost 100,000 more Britons aged 65 and over in the workforce this spring compared with three months earlier.

With the cost-of-living crisis hopefully calming in 2024 it means that inflation will fall and your cash, in real terms, will begin to retain more of its value. Although, the impact that the cost-of-living crisis has had over the past couple of years will have a long-lasting effect that will need to be planned for. Historically, investments have been the only way to beat inflation, whether it is at 2% or 8%. With inflation staying higher for longer, it might be time to consider investing some surplus cash to hopefully let your capital keep pace or exceed inflation, over time.

If you’re concerned about your retirement plans and want a free no obligation review with one of our expert financial advisers, why not get in touch today.

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Please note: This article is intended for information purposes only and does not constitute individual advice. Pensions are a long-term investment; investment returns are not guaranteed, the value of your investments can go down as well as up and you may get back less than you originally invested. The information provided is based on current allowances and legislation and is subject to change.