New financial modelling from leading online pension provider, PensionBee, reveals that due to high and persistent rates of inflation, the average retiree may need an additional £90,000 in pension saving during periods of medium market performance (5% annual growth) to maintain a comfortable lifestyle over a 20-year retirement.
For individuals looking to enjoy a more luxurious retirement, PensionBee’s modelling suggests that these savers may need to put aside an additional £140,000 during periods of medium market performance. In 2021, the average retiree required an annual income of around £19,000 to maintain a comfortable lifestyle, which translates to an overall pot size of £330,000, assuming a 5% annual growth rate and 0.5% fees (1).
PensionBee’s inflation model assumes 10% inflation in 2022 and 2023, 5% inflation for the five years after that, and 2.5% for the following thirteen years with:
medium market performance assumed as 5% growth per year
high market performance assumed as 7% growth per year
Periods of high market performance (7% annual growth) help mitigate the impact of inflation, as the additional savings required to maintain a comfortable lifestyle over a 20-year retirement decreases to £10,000. In 2021, the average retiree required an annual income of around £31,000 to maintain a luxurious lifestyle, which translates to pots of £540,000, assuming a 5% annual growth rate, and 0.5% fees (2).
As inflation stands at 10% (3), eligible pension savers may need to increase their withdrawal amounts by £2,000 (to £21,000 in 2022) to maintain a comfortable retirement and £3,000 (to £34,000) to preserve a luxurious lifestyle in 2022.
Romi Savova, CEO of PensionBee, commented: “Our latest modelling highlights the real impact of today’s record inflation levels on pension savers, particularly for those who may already be withdrawing from their pension.
Despite the alarming numbers, we want to reassure savers that it’s possible to increase the value of their pension by following a few simple steps, without needing to increase their contributions at a time when finances are already tight.
I would encourage pension savers to:
1. Hunt down and consolidate any old pension pots, where it makes sense to do so, in order to avoid losing track of hard-earned savings.
2. Investigate the fees associated with their pension, as significant fees can erode the value of a pot over time. Even a 1% fee saving can make a big difference to an overall pot size in retirement.
3. Keep savings invested for as long as possible, only withdrawing when absolutely necessary, to give a pension as much time to grow.
4. Consider a cautious withdrawal approach when accessing any pension savings. Our research shows that most savers are prudent with regards to pension withdrawals and seek to optimise the lifetime of their pension pots.”
Appendix
Table 1: Additional pension savings required, given high and persistent rates of inflation, at medium market performance, over a 20-year period
| Overall pot size required in 2021 | Additional savings required with medium market performance | Overall pot size required in 2022 | |
|---|---|---|---|
| Comfortable lifestyle | £330,000 | £90,000 | £420,000 |
| Luxurious lifestyle | £540,000 | £140,000 | £680,000 |
Source: PensionBee, August 2022. Medium market performance is defined as 5% annual growth. The model assumes 10% inflation in 2022 and 2023, 5% inflation for five years after that and 2.5% for the following thirteen years, with 0.5% annual management fees. Rounded to the nearest ten thousand pounds.
Table 2: Additional pension savings required, given high and persistent rates of inflation, at high market performance, over a 20-year period
| Overall pot size required in 2021 | Additional savings required with high market performance | Overall pot size required in 2022 | |
|---|---|---|---|
| Comfortable lifestyle | £330,000 | £10,000 | £340,000 |
| Luxurious lifestyle | £540,000 | £20,000 | £560,000 |
Source: PensionBee, August 2022. High market performance as 7% annual growth. The model assumes 10% inflation in 2022 and 2023, 5% inflation for five years after that and 2.5% for the following thirteen years, with 0.5% annual management fees. Rounded to the nearest ten thousand pounds.
Table 3: Withdrawals required in 2022 and 2023 due to 10% inflation
| 2021 | 2022 | 2023 | |
|---|---|---|---|
| Comfortable lifestyle | £19,000 | £21,000 | £23,000 |
| Luxurious lifestyle | £31,000 | £34,000 | £38,000 |
Source: PensionBee, August 2022. 2021 figures are based on Which? data. Rounded to the nearest thousand pounds.
Footnotes
- Which?
- [ibid.]
- Office for National Statistics
