Retirement confidence surges – but is it misplaced?

Retirement confidence has surged with more savers believing they are on track for a comfortable retirement, but there is a risk some of this optimism could be misplaced.

Thirty-three percent of workers are ‘very’ or ‘extremely confident’ about their ability to afford a comfortable standard of living once they retire, according to a survey from financial services company Aegon. This is up from 22% in 2023.

It comes at a time when industry experts and the government are concerned workers aren’t saving enough into their pensions, with a Pension Schemes Bill currently working its way through Parliament in an attempt to improve retirement adequacy.

While it is good to see people feeling more positive about their finances, some of their confidence could be misplaced. Separate research paints a gloomier reality.

Earlier this year, Scottish Widows found that 39% of savers are heading for retirement poverty. A further 22% are only on track for a minimum standard of living. This means no funds to run a car, a limited budget for maintaining your home, and no foreign holidays.

Although the same report found that 30% of savers are on track for a comfortable lifestyle – broadly in line with Aegon’s 33% confidence figure – the outlook is far bleaker for certain groups and demographics.

The risk rises dramatically among young people in their 20s, with 42% currently on track for retirement poverty. A further 23% will only be able to afford a minimum standard of living.

Alarmingly, confidence levels are highest among this age group, suggesting a disconnect between expectations and reality. Fifty-five percent of 25 to 34-year-olds told Aegon they were strongly optimistic about achieving a comfortable standard of living in retirement.

What is a basic, moderate and comfortable retirement?

Each year, trade association Pensions UK publishes a report on retirement living standards, including the cost of a basic, moderate and comfortable retirement.

A basic retirement does what it says on the tin. Retirees will be able to cover regular bills and living costs, but will have to make do without a car and holidays abroad. They can spend around £55 a week on groceries, and £20 a week on activities.

A moderate retirement gives you more financial security and flexibility. Your food budget includes £100 a month to take others out for a meal, for example. You can also run a car, and spend a fortnight in a three-star resort in the Mediterranean each year.

A comfortable retirement allows for more luxuries still, including a £75 weekly budget for groceries, £100 a month to take others out for food, a fortnight in a four-star Mediterranean resort, and a number of UK mini-breaks with significant spending money for each trip.

The cost of a basic retirement is £13,400 a year for a single person, or £21,600 for a couple. A moderate retirement comes to £31,700 (single person) or £43,900 (couple). A comfortable retirement will set you back £43,900 (single person) or £60,600 (couple).

It is worth noting that none of these figures accounts for housing costs, so you can expect to pay significantly more if you are still renting or paying a mortgage in retirement. Younger generations may need to save significantly more when planning for retirement given that levels of home ownership are dropping.

Research from financial services company Standard Life suggests the total cost of renting in retirement comes to a whopping £398,000. In London, this figure rises to £833,000.

How to boost your pension

Pension under-saving is a big problem, but one of the most powerful ways of tackling it is to increase your pension contributions above 8% – the standard minimum under auto-enrolment rules.

Standard Life found that increasing your pension contributions by just 1 percentage point from age 22 – equivalent to £21 a month for someone on a starting salary of £25,000 – could result in a £26,000 pension boost by the time you turn 68.

Upping your contributions by 2 percentage points could result in a £52,000 boost, while a 3 percentage-point increase could give you an extra £79,000.

These calculations assume 3.5% annual salary growth and 5% annual investment growth. They also account for 2% inflation and an annual management charge of 0.75%.

“Making additional contributions to your pension – no matter how small – can make a huge difference to your overall retirement pot later in life,” said Dean Butler, a managing director at Standard Life. “If you are in a position to either increase your monthly payments or make a one-off payment into your pension, it could be worth doing so.”

Butler also recommends redirecting funds into your retirement pot each time you get a pay rise or a bonus. Some employers will even match an increase in your contributions, up to a certain level.

A separate rule of thumb from Scottish Widows is to contribute 12-15% of your salary to your pension, if you are hoping to achieve a comfortable retirement. This includes your contributions, your employer’s contributions, and tax relief.

Our guide on how to boost your pension shares further tips.