Many depend solely on the state pension, but this is far too low to cover later expenses such as serious illnesses, long-term care and funeral costs. Most retirees do not have enough savings to fund these expenses themselves.
Supporting younger family members and adapting your home to the demands of future life add pressure on retirement income.
According to an exclusive study by Aldermore Bank, one in four people over the age of 55 fear for their financial future as the costs of living loom.
While older people have an average savings of £58,215, one in three people have no savings or less than £20,000.
Aldermore Savings Director Ewan Edwards said later living costs can be high and often unexpected. “Building your savings early will lessen the financial impact.”
The average Brit has set aside £1,292 for their funeral, and more than half believe that enough. Still, funerals typically cost £4,056, according to the SunLife Cost of Dying 2022 report.
Similarly, people have saved an average of £1,134 to help children go to university or buy property, but school fees cost up to £9,250 a year and the average security deposit in the UK UK is now £32,841, Edwards says.
Many underestimate the cost of adapting their home for later life, putting aside £955 while the Personal Social Services Research Unit estimates the cost to be as high as £16,647.
The biggest shortfall is in long-term care. The average amount saved is £1,603 and one in five people think that’s enough, but Edwards warned: “The average cost of residential care is now £667 a week. In three weeks, those savings would be gone.
READ MORE: New state pension warning – get forecast now or risk missing out.
While Britons hoarded their savings during lockdown, they are now looting them instead. Two years ago, 14 million Britons could not save anything, which has now risen to 23 million, according to research by Aviva.
Those already in retirement face another challenge, which is to protect their income against runaway inflation, which is expected to exceed 8% in April.
As a result, cash in the bank is plunging in real terms, said Becky O’Connor, head of pensions and savings at Interactive Investor. “Until interest rates on savings accounts rise above inflation, they will represent poor value.”
Most retirees now keep their retirement savings invested by direct debit, rather than lock themselves into an annuity. “It allows your money to grow, but there’s also the risk of it falling in the event of a crash,” O’Connor warned.
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Andrew Tully, Technical Director at Canada Life, suggested combining the levy with an annuity to give you the ideal combination of security and inflation protection.
“An annuity gives you guaranteed income for life, which you can use to cover essential expenses.
“The levy offers more flexibility on withdrawals, and hopefully your money will grow over time, to offset the impact of inflation.”
Today, a 65-year-old single man with £100,000 can get a level annuity income of up to £5,454 a year. That’s nearly £1,000 more than last year, due to rising interest rates.
Chancellor Rishi Sunak is expected to reinstate the triple lock for 2023/24. The inflation component will be based on the September figure, which is expected to be 7.4%.
This should give retirees some protection and Tully said: ‘Hopefully today’s inflationary spike will subside soon.’