A lot of people have an annual income in mind that they want their pension to provide — hit that and they can retire. For the average pension saver, that’s £48,868 a year, according to a new study by Royal London, a pensions provider.
But a fixed level of income is not necessarily the best way to think about retirement spending. Instead, experts suggest planning for a “retirement smile” — with higher spending when you first stop work and if long-term care is required at the end of your life, with a lull in between.
Last week, I wrote about how pensioners need to break out of the “saver mindset”, which can hold people back enjoying their retirement. Later-born generations seem to be better at it than older ones: they spend more at the start of retirement on categories such as leisure services and holidays, according to a 2022 report from the Institute for Fiscal Studies.
But, of course, it’s much easier to feel comfortable spending if you have a detailed plan of what your future outgoings might look like.
A comfortable baseline retirement income devised by the Pensions and Lifetime Savings Association (PLSA), which represents UK wealth managers, is £43,100 for a single person and £59,000 for a couple.
What this pays for is worked out in quite colourful detail. It provides for £40 a week per person on eating out, replacing the kitchen and bathroom every 10-15 years, running a three-year old small car, replaced every five years, a fortnight’s four-star holiday in the Mediterranean (a Thomas Cook sea-view suite in Mallorca, costing £1,545 for two in June 2024, to be precise) plus three long weekend breaks in the UK.
Not to be sniffed at, but for wealthier savers this income level might be the bottom of the smile. How steep can the ends go? “It can be as steep as you like, but it’s easy to spend early on — the issue is making sure that doesn’t undermine the late spending,” says Emma Sterland, chief financial planning director at wealth manager Evelyn Partners. Advisers say it’s not uncommon for wealthy clients to add an extra £10,000 a year of holiday spending, say in the first five to 10 years of retirement.
“My experience tells me the time spent enjoying your savings in retirement is much longer than the time spent in a care home, so it’s a different pattern of spending,” says Sterland. “We might want to be staying in nice hotels and flying long haul from age 60 right up to 80 or so — but perhaps only spend three or four years in a care home.”
The PLSA also provides for spending on the dentist, optician and podiatry. But it doesn’t include comprehensive health insurance. Add that on top and you see the right-hand end of the smile becoming steeper.
According to MyTribe Insurance Experts, typical core private medical insurance cover, which excludes outpatient consultations and has limited diagnostic testing, plus £1,000 of outpatient cover per policy year, can cost £127.42 a month at age 60, rising to £196.14 at age 70 and £261.34 at 80. “Another challenge is that several leading providers stop offering their products to new customers at age 70 or 80,” says Chris Steele, myTribe’s founder.
As for end-of-life expenses, analysts at data provider LaingBuisson say fees for residential care or nursing homes have spiralled over the past two years, with some people likely to pay up to 20 per cent more in 2023-24 than in 2021-22. The average weekly fee for a residential care home bed has grown to £949 per week, while the average weekly fee for a nursing home bed is now £1,267. The most expensive fees can be found in the south-east, at £1,152 and £1,457 a week respectively — and some luxury homes can cost significantly more.
To help you navigate your retirement smile, a financial planner would use specialist software to do cashflow modelling — effectively twiddling the dials to show how early expenditure might determine later affordability. They may segment your assets into “buckets” designated for specific time frames and purposes, aligning spending needs with financial resources and market conditions.
Alternatively, free retirement income modeller Guiide allows you to add extra income in the early years of retirement and gives options to tweak the plan, including if you need some care.
Guiide specifies £40,000 a year for care in the last two years of life — which feels deeply conservative to me. If you go into a care home after age 80, you could spend two to four years there, according to Office for National Statistics data, meaning a potential total expense of hundreds of thousands of pounds.
It’s worth bearing in mind that most people will not incur these huge expenses. The Institute and Faculty of Actuaries estimates that, in England, one in four men and one in three women over 65 will have “substantial care needs at some point in their lives”. UK census data from 2021 shows that around eight in 10 people aged over 90 were not living in care homes and less than 4 per cent of those aged 80 to 84 were in care homes.
So if you keep a sum reserved, but don’t end up spending it, is there anything you can do to shield it from the taxman?
As pensions are to be subject to inheritance tax from 2027, the most suggested answer by wealth advisers is to take out life cover — and write the policy into trust to ensure that the proceeds are not captured as part of the estate.
Royal London’s pensions and tax expert Clare Moffat says: “Options could include whole-of-life policies, where a payout is made whatever age the person dies at or joint life second death plans where there is a payout made on the death of the second person in a couple, up to age 90. These policies tend to have lower premiums.” For a non-smoking couple aged 80, insuring a sum of £300,000 on a 10-year term with Royal London would cost £5,828 a year.
It’s a solution, but it still adds to the final stretch of the retirement smile — and it’s an expense that you won’t personally gain from, though in the end your children may thank you for it.
Moira O’Neill is a freelance money and investment writer. Email: moira.o’[email protected], X: @MoiraONeill, Instagram @MoiraOnMoney
https://www.ft.com/content/db205747-3c30-493f-996b-da9f1cef3b95
