Dreaming of a retirement in the sun? You’re going to need an extra £4,200 a year

• Pensioners need an extra £4,200 every year for a comfortable standard of living 
• Over the course of a 20-year retirement, the additional amount is £68,700 
• For the lowest standard of living, pensioners need £59,900 in their nest egg

If you imagine a retirement that involves kicking back and enjoying the spoils of all your life’s hard work, you may just want to scrutinise your sums again. 

With every month that goes by, the financial goalposts shift so that what once would have afforded a comfortable retirement no longer will. 

Thanks to soaring inflation, the amount of income you need in retirement to keep up your current lifestyle has increased dramatically.

Analysis for Wealth & Personal Finance finds that pensioners now need to find an extra £4,200 every year to maintain a comfortable standard of living in later life.

Over the course of a 20-year retirement, the additional amount needed in a pension pot as a result of rising costs amounts to £68,700, calculations by stockbroker Interactive Investor reveal.

Prices and daily expenses have soared by 9.1 per cent since last April, significantly eroding spending power. 

Pensions industry guidelines estimated that last year it cost £43,500 for a single pensioner to lead a ‘comfortable’ life before tax. But that has soared to £47,700 a year today, when accounting for inflation over the past year. 

This might afford a three-week holiday in Europe every year, a new kitchen and bathroom every ten to 15 years and a new car – and £157 on food every week.

Those on the full state pension, which pays £10,600 this tax year, would need an income of £37,100 from their private pension to achieve this lifestyle.

However, more than nine in ten workers are not saving enough into their pension to guarantee themselves a comfortable retirement, according to the Pensions and Lifetime Savings Association (PLSA) which sets the spending guidelines.

The association’s ‘retirement living standards’ are widely used by the pensions industry as a measure of how much money people need in retirement to maintain their spending habits.

Nearly three quarters of retirees will be living to a basic ‘minimum’ standard, affording to eat out just once a month and will not have enough income to keep a car.

In order to meet this ‘minimum’ standard of living, £14,300 a year before tax is needed – up from £12,900 last year. When accounting for the state pension, it means those in this category would need to draw an annual income of £3,700 from their private or workplace pension savings.

Pensioners need £59,900 in their retirement nest egg to be able to afford this lowest standard of living if they were to buy it as an annuity. These contracts exchange a cash lump sum for a guaranteed yearly income until death.

Last April, they would have needed just £36,500 – a difference of £23,400.

But those aspiring to a comfortable lifestyle will need a pension pot worth £598,700 on top of their annual state pension. That is £68,700 more than they would have needed in 2022.

Alice Guy, of Interactive Investor, who ran the calculations for The Mail on Sunday, warns that high inflation will have a devastating impact on pensioners’ spending power.

She says: ‘They need so much more pension income just to maintain the same spending power. These kinds of eye-watering sums are simply unaffordable for pensioners, many of whom have a small private pension pot that is reliant on stock market performance and may not have kept pace with inflation over the last 18 months.’ 

Worse, she warns of the danger of withdrawing more from your pension pot. ‘It could have a long-term impact on your pension wealth – withdrawing too much could mean some pensioners run out of money earlier than planned.’

One sliver of income that is guaranteed to be inflation-proof is the state pension.

Under the triple lock, the payment rises by the highest of inflation, earnings growth or 2.5 per cent every year. Pensioners are on track to receive an above-inflation increase next year, as earnings growth has been higher than expected.

Official earnings data released last week by the ONS recorded annual earnings growth at 8.2 per cent from April to June.

Meanwhile, inflation dropped to 6.8 per cent in July and economists predict price rises will slow again over the coming months. If earnings growth remains at this level for another month, pensioners would see their income rise by £869 a year. 

But that covers less than a quarter of the extra £3,700 they need to afford a comfortable retirement.

So what can you do to safeguard your pension against spending erosions? Keeping your workplace or private pension invested in the stock market puts you in with a chance of matching inflation, says Rebecca O’Connor, of pensions provider PensionBee.

Pensioners should also ensure they are making the most of their tax allowances and claiming pension credit where eligible.

For those approaching retirement, it is important to make sure you are not losing out on thousands of pounds to fees. The average person has 12 different jobs over the course of their career, which means they could have a dozen different pension pots. You can transfer some of these pots of money to consolidate your savings.

This can be a good way of saving on the fees charged by pension providers, especially if you notice some are charging far more than others. A small difference in fees can cost tens of thousands of pounds over decades. It is equally important to take a close look at charging structures when retiring.

The difference in growth between the cheapest and most expensive ‘drawdown’ plans – where you take money from your pension pot as and when you need it – for a £260,000 pot was nearly £18,000 over a 20-year retirement, according to consumer group Which?.

You can also consider delaying retirement or working part-time in your later years. This will mean you will have a larger annual pension income when you do finally leave the workplace.

According to Canada Life, if you stop paying into your pension at age 55, your final nest egg will be 59 per cent smaller on average than if you had kept saving until state pension age, which is currently 66.

If you are unsure how much you will need in retirement and how to manage your money, make use of the Government’s free Pension Wise service. Book a free pensions guidance appointment at MoneyHelper.