In recent years British pensioners have been getting an increasingly good deal out of the State Pension - but is it enough to rely on completely in later life?
For most British retirees the State Pension makes up the bedrock of their retirement income, and for the last 10 years it has been guaranteed to increase every year by either inflation, wages or 2.5% thanks to the triple lock. In a decade that has seen wages stagnant and inflation remain at historic lows, this has been a great deal for pensioners - and next year they will get another increase of 2.5%.
In April 2021 the new flat-rate State Pension (for those who reached State Pension age after April 2016) will go up by £4.40 to £179.60 a week, or £9,339.20 a year. The old basic State Pension (for those who reached State Pension age before April 2016) should go up by £3.35 to £137.60 a week, or £7,155.20 a year.
And, because of a coronavirus-related quirk this year, forecasters have it that those in receipt of the State Pension could be in line for an even bigger income boost in 2022, gaining an extra 4.1%.
Inflation is creeping along at less than 1% (and has been for a decade), meaning those receiving the State Pension are seeing their income rise by more than the amount goods and services are going up. So does all this mean British savers can stop paying into their private nest eggs and rely solely on the State Pension? Probably not.
The Pensions and Lifetime Savings Association (PLSA) has worked out that for a basic retirement a single person needs at least £10,200 a year (£15,700 for a couple). This should provide a minimum to cover all their needs, plus enough for some fun. For example, a holiday in the UK, to eat out about once a month and do some affordable leisure activities twice a week. But that’s almost £1,000 a year more than the new full State Pension will provide a single person. For those receiving the old basic State Pension the shortfall is an even bigger £3,000 a year.
The good news is that through a combination of the State Pension and some private or workplace pensions (which is now more likely for everyone thanks to Auto-Enrolment), the PLSA’s basic retirement income should be very achievable for most people.
Of course, what we all really hope for in our golden years is to retire in some style. For that, you really will need more than the State Pension! For a moderate lifestyle in retirement - maybe a two-week holiday in Europe and to eat out a few times a month – you’ll need about £20,200 a year (£29,100 for couples).
At the more comfortable level - regular beauty treatments, theatre trips and three weeks in Europe a year - a single retiree would need £33,000 a year (£47,500 for couples). These figures will vary. When consumer champion Which? surveyed its members recently, it found retired households spent on average £2,110 a month, or £25,000 a year, with the basics costing £17,200.
Luxuries like long-haul trips and a new car every five years bumped the overall retired household figure in the Which? survey up to an annual £40,000 income - a long way from the £9,300 a year the State Pension will provide next year. You may think you’re quite frugal now and won’t mind a retirement lacking the luxuries. But remember, we’re all living much longer. A 30 year retirement is a very real possibility, and three decades is a very long time to be constantly counting the pennies.
The State Pension is a great foundation for retirement savings, but you’ll need to top it up with your own private nest egg to enjoy a really comfortable later life.