This podcast isn’t personal advice. If you’re not sure what’s right for you, seek advice. Tax rules can change and benefits depend on personal circumstances.
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This podcast is for information purposes only and is not personal financial advice. Pension and tax rules can change, and benefits depend on individual circumstances. The value of investments can rise and fall, so you may get back less than you invest. Past performance is not a guide to future returns. Income drawdown is not guaranteed and there is a risk of running out of money in retirement. [Annuities provide guaranteed income but once purchased they cannot normally be changed or cancelled. Pension benefits cannot normally be accessed until age 55, rising to 57 from 2028. If you're unsure about the suitability of any retirement option, seek free guidance from the government’s impartial Pension Wise service, or personalisedfinancial advice.
Full podcast episode transcript
Helen
Hello and welcome to the Switch Your Money On podcast from Hargreaves Lansdown. I'm Helen Morrissey Head of Retirement Analysis.
Clare
And I'm Clare Stinton Senior Personal Finance Analyst. Today we are going to be talking about retirement adequacy. How much do we need in retirement? And I mean, this is the big question that so many of us rightly ask. But we're also going to explore how the decisions we make when it comes to withdrawing our money can impact how much we need in retirement. We tend to place so much focus on issues like how much to contribute during our working lives. And don't get me wrong, that is really important, but we can overlook the decisions we make about what to do with our pension when the time comes. And that's hugely important, isn't it Helen?
Helen
You're absolutely right there, Clare. So, I always find this stuff fascinating. But then I would, wouldn't I. People have so much choice available to them when it comes to how they take their income in retirement, but they all come with their pros and cons. So, you really need to weigh up the options. However, I think what we've also got to share is that we do have some data that people will find more encouraging about their ability to be able to meet their essential expenditure in retirement.
Clare
Okay, I'm intrigued, but before you delve into the data, Helen, as an explanation, we are releasing a thematic report on the UK's pension adequacy. We work with Oxford Economics on this report, and they look at the best available data sets out there to understand how retirees are spending. And I mean, we're talking about huge robust data sets. And then they use that to make some assumptions around how different choices might impact retirees. So, I'm interested to hear about what the report found. Tell me more.
Helen
Okay, well first things first. We found that household spending falls across retirement. And this really matters for retirement planning. So, for a high earning household age between 75 and 87, average annual expected spending in retirement is 5.3% lower than for a similar household aged between 67 and 74 this fall is smaller for lower earning households at just 2.1%. This reflects the fact that their spending is more concentrated on the essentials, and therefore there is less scope to be cut back as they age. What's also interesting is when you look at the difference between single person households compared to couples, we see much smaller reductions in spending and single person households over their retirement. So, taking a look at the medium income group, we can see the spending decreases by 3.1% in non-essential spending for singles. This compares to a much larger decline of 9.5% for a couple. Again, this is down to their ability to share costs and a bigger capacity to decrease their discretionary spend. It points to the need for extra flexibility for groups such as couples and those on higher incomes when making retirement income choices.
Clare
Okay, that's interesting and a really important point for people considering their retirement options. If you go for a level annuity in the beginning the income you get may be enough. But over time, inflation is going to nibble away at its purchasing power and could leave you with issues you need to be aware of. Similarly, if you think that you are going to need a degree of flexibility over time, then drawdown is an option as it allows you to increase or decrease income as needed. But there's pros and cons there too. I think we do need to remember that we can spend 20 to 30 years in retirement. So, what I like to call your longest ever holiday. But realistically, if you are retiring in your 60s and you live into your 80 or 90s, that is 20 to 30 years, it's a long time and a lot can happen.
Helen
The report also found that around 9 in 10 households will be able to meet their essential expenses in retirement, so that's good news. They'll be able to meet these expenses by combining their full new state pension and their private or personal pension to purchase what is known as an inflation linked annuity. If we dig a bit deeper into that figure, we can see that almost all low earners, so around 95% are able to cover their expected essential spending through this approach. This is because it's largely covered by the state pension. However, this figure falls to 87% for high earners. The reason for that is that a smaller proportion of their expected essential spending will be covered by that state pension.
Clare
That is really interesting. And as you say, good news. Just as a reminder for anyone listening, the full state pension for this tax year 2026/27 is £12,548. So that works out to be about £241.30 a week. You do need 35 years of National Insurance credits to get that full entitlement, and you need a minimum of ten years of National Insurance credits to get any form of state pension. So, if you find yourself having somewhere in between, then it will be proportionately reduced. You are able to go onto the government website to see what you're on track to receive by way of state pension, so really worth doing that if you haven't done already. Now, Helen, being able to meet your essential day to day expenses is the priority. And then you can save over and above that if you want to do more with your retirement, like go on holiday or treat loved ones.
Helen
Absolutely. And I think it shows how valuable it can be to think about what you want your retirement to look like in advance. We all want something a bit different, and that is going to impact how much your retirement costs. If you can give it some thought and then maybe use an online calculator to see what your current pensions are likely to give you. That can be really, really helpful. If you are on track, then great. If not, then you've got some time to do something about it.
Clare
I like what you said about retirement being very personal. We see a lot of figures in the press saying how much retirement can cost and on the one hand that can motivate people, but on the other hand, those figures could be daunting and might scare them too.
Helen
I think it is important to say that that kind of data; so, for instance, we've got the pension UK retirement living standards and they're a great way to start the discussion about what you might need for retirement. But they aren't intended to be taken as gospel. They are there to start a discussion.
Clare
Absolutely. And if you do look at what you've got and realise there's a gap for what you need. There are things you can do about it. It's never too late to improve your retirement outlook. Even small steps, such as increasing your pension contributions every time you get a pay increase or a new role can make a big difference. Another option is to make sure you are making the most of your employer contributions. Some employers are willing to increase their contribution to your pension if you increase yours. So this is known as the employer match. And over time it can make a huge difference. And this is also money that you wouldn't otherwise receive. So, it's additional compensation. If you can afford it, it's a no brainer.
Helen
I think they're all really great ways to boost how much goes into your pension.
Clare
So, what else did the research demonstrate? You mentioned that the combination of a state pension and an inflation linked annuity can help people meet those essential expenses over time. Can you tell me a bit more?
Helen
Yeah. So, I think that what comes out of this research is that the state pension continues to play a major role in people's retirement adequacy. So, if you take the state pension out of the equation, then the number of households that will be able to meet those essential spending targets falls to just 41%. Now that's a big drop. You know, if we move from that 9 in 10 households that I mentioned earlier. So that demonstrates how important it is to make the most of your own pension saving to boost your retirement outcomes. I've said that the combination of state pension and inflation linked annuities can help 9 in 10 people meet their essential spending. However, you are likely to want more than a basic standard of living. If we look at total spending, so being able to maintain your standard of living, then around 62% of households can do that with this approach.
Clare
Okay, so there's still more people need to do if they want to maintain their lifestyle in retirement. The power is very much in their hands.
Helen
Absolutely. So, you know, I mentioned that inflation linked annuity there. Now this is one of several approaches that we've modelled as part of this research. An annuity is where you hand your pension to a provider and in return they give you a guaranteed income for life. You can get a level annuity, one that delivers the same level of income every year. Or you can get an inflation linked one where it rises every year to help maintain your purchasing power. The fact that the inflation linked annuity rises every year is one reason why so many households would be able to maintain their essential spending.
Clare
We should say that arranging guaranteed income to cover your essentials in retirement is usually a good idea. For instance, this may be particularly important for someone taking mortgage payments or rent into retirement to ensure they can keep a roof over their but what about if people opt to use income drawdown rather than an annuity in retirement? What are we seeing there?
Helen
So, we looked at two different income drawdown strategies. The first one is the 4% strategy. And this is where you take 4% of your pension every year. This increases with inflation every year to protect your purchasing power. With someone opting for this approach. The modelling shows only 56% of households are on track to cover their expected total spending. This is because it's aimed at making sure that you don't run out of money, but that then puts you at risk of not being able to meet all your outgoings because you're being really conservative. The other approach we looked at was a more aggressive strategy, whereby someone would aim to draw down their pension by the age of 87, in line with current longevity expectations. Such an approach would see 70% of households meet the standard of living. However, there is a massive caveat here, adopting such an aggressive strategy does risk households exhausting their pension savings later in life and then being left to rely solely on the state pension, which would expose them to a drop in living standards.
Clare
There's clearly pros and cons to all approaches, aren't there? If you use annuities, you do need to be aware that once bought, they can't be unwound. Income drawdown leaves you exposed to investment volatility, and that could see the amount of income you can withdraw over time go up and down as markets move. You've got the flexibility to take more. To make sure you don't run out of income you need to take that long term approach, don't you? And one option is to combine income drawdown and annuities to get the best of both worlds. For instance, you could use drawdown in the early years and then annuitize a bit later on.
Helen
Yes. So, these kinds of hybrid strategies offer more flexibility and can help more people hit their desired spending targets. However, they are complicated. They require households to make well-timed decisions about when to annuities, and this can be difficult given uncertainty around investment performance, life expectancy and future spending needs. Annuity rates change regularly and can go up and down in the future. During the drawdown phase, households remain exposed to the market and sequencing risk, meaning that adverse returns early on in retirement can significantly reduce future income. Within hybrid strategies affordability outcomes are better when non inflation linked annuities are purchased, with around 69% of households on track to meet their expected spending. This compares to 64% when inflation linked annuities are purchased. However, this again reflects the lower upfront cost of a non-inflation annuity and increases the risk of falling purchasing power and reduce living standards in later retirement.
Clare
Wow, the certainly a lot to consider there. And due to the complexity, this is an area where people may wish to get financial advice before making these kinds of decisions to give them peace of mind.
Helen
That's right. And another option is Pension Wise, a free, impartial, government backed service which provides guidance on pensions and retirement. It was set up specifically to help people understand the accumulation phase of pensions. For anyone over the age of 50 it offers 1 to 1 appointments. These can be used to discuss different retirement options and the tax implications. They don’t provide financial advice, but they do offer guidance and a second opinion.
Clare
So, one last topic before we wrap up, Helen. The research also looked at the role of tax-free cash in retirement, didn't it? I know people often use it for big one-off purchases such as home renovations or travel. However, it is worth pointing out that rather than a splurge, tax free cash can also play a huge part in helping people both manage their tax bills in retirement and meet their income targets.
Helen
You're absolutely right, Clare. So, what we do with our tax-free cash is hugely important. This research shows that it is important to have a plan. If you draw it down to early and spend it, you could be left with a gap later on, particularly when it comes to being able to afford the nice to haves. Higher income households experience a larger reduction in affordability as they rely more heavily on defined contribution pension wealth to support both essential and discretionary spending.
Clare
So, I guess the moral of that is to not take the tax-free cash just because you can, you do need to have a plan for it. So that's all for this week. But before we go, we should remind you that this was recorded on the 30th of June 2026 and all information was correct at the time of recording. Next week, Anna Macdonald and Matt Britzman will be back with an investment special.
Helen
Nothing in this podcast is personal advice. If you're unsure about what's right for you and your circumstances, you should seek advice.
Clare
Pension and tax rules can change and benefits depend on circumstances. Pension money can't normally be accessed until 55. Rising to 57 in 2028. Helens already pointed out the opportunity with Pension Wise. So again, for anyone over 50, you can book a 1 to 1 appointment to discuss your retirement options and the tax implications. It's not financial advice, but they can guide you to see the full picture and provide a handy second opinion.
Helen
Over five years or more, investing typically offers better returns than cash savings. However, investments go and down in value so you could get back less than you put in. So, all that's left is for us to thank our producer, Elizabeth Hotson.
Clare
And to thank you all very much for tuning in. We'll be back again soon. Goodbye.
Helen
Goodbye.