How Much Will You Spend In Retirement?

Posted on: 17th Feb 2018

The good news is that, due to the increase in life expectancy in the UK, the average time spent in retirement is currently 22 to 25 years. This means we all have more time to enjoy life, but equally means that we need to think quite carefully how we plan our finances, and budget accordingly.

To enjoy a comfortable old age means doing some in-depth thinking about how much you’ll need to spend under a variety of headings such as basic living costs, spending on your family and most importantly, enjoying life to the full.

Consumer magazine Which? recently surveyed thousands of its retired members to see where their money is being spent. They found that households spent on average a little under £2,200 a month or around £26,000 a year. This expenditure covered all the usual basics and provided for a few luxuries such as European holidays, hobbies and meals out. They estimated that if long-haul trips and the purchase of a new car every five years were to be included, the figure would increase to around £39,000.

Everyone has different retirement goals, but here are some commonly-used headings that can be helpful when working out your likely annual expenditure.

Survival

This heading covers all your likely regular expenditure and running costs. If you’ve paid off your mortgage, then your living costs will obviously be lower. However, you should still think about how much you’ll need to spend on maintenance costs, repairs and refurbishments. If you’re renting, and more and more retirees are, you’ll clearly need to factor in your rent.

Your utility bills are likely to rise, as you’ll probably spend more time at home and need to heat your house for longer. Your travel costs may go down dramatically if you no longer need to factor in the expense of travel to work. However, commuting could give way to more days out and the opportunity to travel further afield.

Freedom

Under this heading goes all the likely costs of doing and enjoying all those things that you never had time to do before you retired. So, if you’re planning a trip, a major purchase or want to indulge yourself in other ways, this is the amount you feel you’ll need.

Safety Fund

Typically, expenditure under this heading would include health and later-life care costs, loss of income and any emergency financial help you might want to give your family.

Gifts

This is the amount of money you may want to pass onto your children and grandchildren during your lifetime. This could include help with education costs or a deposit on a property.

 

It is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

The information contained within this newsletter is for information only purposes and does not constitute financial advice. The purpose of this newsletter is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice.

Cut In Money Purchase Allowance Retrospective

When the snap general election was called in May, several measures were withdrawn from the Finance Bill pending the outcome. One was the reduction in the money purchase annual allowance from £10,000 to £4,000 a year.

The Treasury has now confirmed the reduction will be back-dated to the start of the current tax year, meaning that those over 55 who have accessed their pension savings will now find that the amount they can contribute to their money purchase pension will be restricted to £4,000. This limit includes tax relief and employers’ contributions.

However, in most cases those who have yet to access their pensions savings will still have an annual allowance of £40,000 on which they will continue to be able to claim tax relief, though this allowance is tapered for high earners (£150,000+ per year).

Those most likely to be affected by this move are those still in work who have decided to dip into their pension early. But if they have only taken their 25% taxfree lump sum and nothing else, then this restriction won’t apply.

Pensions can be complex, if you’d like advice – get in touch.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.