25th September 2014
As fears rise that pensioners-to-be are gearing up for a luxury spending bonanza, new research from specialist insurer Partnership suggests that many retirees are more likely to endure an income shortfall when they finish work.
To meet essential costs while enjoying some discretionary expenditure, retirees need a take home income of £14,631 per year, £1,626 more than the typical UK pension income of £13,006 according to Partnership. But the group expects many people will need to tighten their belts when it comes to splashing their cash on the finer things of life more in order to meet essential bills.
Partnership surveyed more than 1,500 people between the ages of 40 and 70 and asked them how much they believed that they would spend on a typical shopping basket of expenses when they retired. Essential expenses such as utilities, food, clothing and household maintenance made up 72% or £10,598 of their expenditure while discretionary expenses such as socialising and holidays made up the remaining 28%, or £4,033 of their outgoings.
Those aged 40 to 50 believed they needed the most, at £17,549, followed by those aged 66 to 70, with £14,112. But those just about to retire actually forecast that they needed just £11,568, suggesting that while people enter retirement determined to stick to a strict budget, they find that later life is far more expensive than anticipated.
While the level of pension income received ranges between £11,754 in Northern Ireland and a much higher £14,062 for Londoners, the amount people believe they need varies far more from £18,238 in Scotland to £11,864 in Yorkshire. Taking into account the average pension income in each area, the Scottish look to have the largest deficit between reality and aspiration, with a £5,433 shortfall, followed by those in Wales with £2,995 and the East Midlands at £2,419.
Andrew Megson, managing director of retirement at Partnership, said: “This research clearly shows that in order to heat and eat, people may well need to cut back on the more enjoyable aspects of retirement such as holidays, socialising and luxuries. This seems completely contrary to the picture of retirement that we generally aspire to and suggests that not only do people need to save more but they need to carefully budget their retirement income.
“While most employed people have some expectation that their income has the potential to rise in the future and budget accordingly, retirees are asked to guess what level they need their income to be for the rest of their lives. Therefore, making a choice to take a guaranteed income to cover your essential costs might seem sensible with an enhanced annuity arguably providing the most cost effective way in which to do so.
“Retirement finances can be daunting but ensuring that you have the essential income you need means you can take greater investment risks with any other income you have.”