On the edge: Hundreds of thousands of older workers retiring will do so at the ‘worst and most stressful’ time in a very long time
Hundreds of thousands of older workers retiring this year will do so at the ‘worst and most stressful’ time in a very long time, experts warn.
They will need an extra £145,000 to match the same retirement they would have been able to afford at the start of last year, calculations for The Mail on Sunday reveal.
This is because out-of-control inflation is rapidly eating away at the purchasing power of savings, while falling stock markets have wiped thousands of pounds off the value of pension pots.
More than 700,000 Britons will turn 65 this year and there are fears that many risk running out of money if they don’t delay retirement.
It has been calculated that rising living costs over the last year have meant that pensioners already need an additional £90,000 to meet the same standard of living.
But with inflation stubbornly high, the amount needed in a pension pot at the start of retirement will rise by a further £55,000 by the end of 2023, according to wealth manager Brewin Dolphin, whose wealth director Carla Morris says it is a particularly challenging time to retire compared to previous years.
A single pensioner needs £37,300 a year to live a ‘comfortable’ retirement, according to industry body the Pension and Lifetime Savings Association.
That is an extra £3,700 – or £308 per month – on top of what was needed in 2022. However, if inflation averages 7 per cent in 2023, as forecast by audit firm Mazars and economic research group Moody’s Analytics, pensioners will need to find a further £2,600 a year.
The new state pension, which is currently worth £10,600 a year, will cover just a little more than one quarter of the income needed to live comfortably.
The amount pensioners need in their retirement nest egg to buy this ‘comfortable retirement’ income from an annuity will rise by £145,000 this year to £685,000, says Ms Morris. These contracts exchange a cash lump sum for a guaranteed yearly income until death.
Three in four people don’t think they have enough in their pension pot to retire, a survey by Brewin Dolphin finds.
Rebecca O’Connor, of PensionBee, says pensioners are facing a double whammy, as they need more money to live but also have less in their savings after markets have dropped.
‘It is definitely a harder time to retire. There is a higher cost of living but many have also experienced negative growth on their pension pot,’ she says.
Those who retire this year risk locking in any losses they have made on their pension’s investments and wiping out any hope of their fund bouncing back, she adds.
‘Very often we are told not to time life events. For example, when you need to buy a house, you shouldn’t try to time the property market. But when it comes to your pension pot, you should absolutely take into account economic circumstances where possible.’
Steven Cameron, of pensions group Aegon, says those who can afford to, should consider delaying retirement for a few years to minimise the destructive effects of inflation.
‘It is a far more stressful time to retire – and the best way to protect your prospects is by working a few years longer. This allows you to save more and have a larger pot to fund a shorter retirement.’
Other options to boost retirement income include increasing pension contributions while you’re still in work and making sure your pension savings are invested to produce the best possible returns.
O’Connor warns that people may also have to rethink their retirement expectations.
‘For many years you may have thought you were entitled to a retirement that involved nice hobbies and holidays, but people are having to quickly recalibrate as they realise they won’t have enough money for that now,’ she says.
Earlier this month, leading think-tank the Institute for Fiscal Studies sounded the alarm over a looming pensions crisis.
It claims that future retirees will be much less comfortably off than current pensioners.
Those concerned about their finances should split their savings to generate different sources of income, Carla Morris of Brewin Dolphin says.
You can do this by combining an annuity – which provides a low but guaranteed income every year until you die – with stock market investments.
‘Knowing a large portion of your bills will be covered can give you some comfort, while retaining an invested element to help meet further expenses,’ she adds.
