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How much do you need to save to pay the bills in retirement?

Fully finishing work is an unsettling time as the certainty of a regular pay packet disappears. For many the state pension will be a key source of income in retirement; Hargreaves Lansdown have looked at how much money you need to pay some of the core household expenses for life, if you have to meet the costs out of your savings.

Item of spending Average annual spend How much of your pension would be needed to buy enough income to cover this item?
Food £2,808 £86,000
Leisure and hotels £2,210 £66,000
Electricity and gas £1,253 £40,000
Clothing £993 £32,000
Housing repairs £364 £12,000

The figures are based on annuity purchase for a 65 year old. The annuity is single life, with no guaranteed period and paid monthly in advance. The income increases in line with RPI. Average annual spend data sourced from Office for National Statistics.

Options to provide retirement income include:

  • Income drawdown allows you to keep your pension invested with the option of taking unlimited withdrawals, until the money runs out. The income provided is not secure. You could receive an increasing income in retirement if investments perform well and you don’t draw out too much income every year. However, you could run out of money if you withdraw too much, investments perform poorly or you live longer than expected.
  • Buying an annuity where you exchange the money in your pension for a guaranteed income for life. The income is provided by insurance companies and specialist annuity providers. You can also provide some protection for your family in the event of your death.
  • A mix of annuity and income drawdown. This is often overlooked, but can give an appropriate blend of flexibility and security for example when looking to guarantee that the retirement spending essentials are covered.

Nathan Long – Senior Pension Analyst at Hargreaves Lansdown:

"Retirement is extremely personal and everyone has different needs and requirements for spending their pension savings in the years after work. Many people will have exciting plans of how to occupy the extra time they have, so often household spending will be higher in the first few years after work. Many costs such as food, electricity and gas bills will constantly be around in retirement and will increase alongside inflation, so guaranteeing they can be paid both now and in the future can provide valuable peace of mind. Buying an annuity with your pension guarantees an income for life, but it can be done in instalments. The highest income is obtained by shopping around for the best deal especially as around two thirds of people can get improved rates due to their health."