Why do I need MORE than the average salary for a comfortable retirement? STEVE WEBB replies

The Pensions and Lifetime Savings Association seems to have issued advice on appropriate pension levels for different lifestyles in retirement.

This is laudable. However, it has left me somewhat confused. The amounts recommended are after tax and do not include housing costs but appear in many cases to exceed current average income levels of working people, who are presumably paying for mortgages and children.

The PLSA provides a figure of £43,100 being required for a single person for a comfortable retirement.

That would by my calculations require a pre-tax income of approximately £53,000. You can add another, say, £15,000 gross to that to cover mortgage taken from net income. Even then I think that’s low.

In practice you’d need around £68,000-70,000 of income. That is almost twice the average UK salary according to the Office for National Statistics.

So even including the state pension, I can’t understand how many people can get an annual pension income, which for many is far in excess of their salary during their working life. Even generous final salary schemes are not that generous.

How can people save sufficiently to provide an income in retirement which they cannot even earn in salary? What am I missing?

Is the answer that you can only have a comfortable retirement if you are a higher earner during your working life?

Steve Webb replies: The question ‘how much do I need to save for a good retirement’ is one of the most commonly asked, and for a long time it has been hard to give a straight answer.

But the Pensions and Lifetime Savings Association has sought to help people by coming up with figures for the sort of budget you might need in retirement depending on whether you are targeting a bare ‘minimum’ standard, a ‘moderate’ standard or a ‘comfortable’ standard.

There is more detail on how the PLSA have come up with these figures on the dedicated website.

The main headline figures are shown in the table below, separately for singles and couples, whilst separate figures for those retiring in London are available on the website.

As you point out, the latest figures for average earnings show that, even excluding bonuses, the average earner was grossing around £34,500 in December 2024.

After the deduction of tax and NI contributions, this represents take-home pay of just over £28,000 before the payment of rent or mortgage.

On this basis, Britain’s average earner has a living standard well below the ‘moderate’ target for a single retired person.

And you are right to say that the ‘comfortable’ standard is beyond the reach of most workers. Projections by the Department for Work and Pensions suggest that nearly nine in 10 of today’s workers will fail to reach this standard.

It would be easy to conclude from this that these benchmarks are excessive or of limited practical value to the bulk of the population.

However, I think that if they are carefully interpreted there is still much to be gained from comparing your expected retirement income against these figures.

The first reason is that the estimates are derived from careful research among what the general public to see what they think constitutes a minimum, moderate or comfortable standard of living in retirement.

In other words, the figures themselves are not based on what a highly paid individual would want or expect, but on the hopes and expectations of the mass of the population.

If this process comes up with some high figures relative to average earnings, then this may in part reflect the fact that some of those in work – and single earners in particular –are struggling to achieve a decent standard of living.

A second thing to bear in mind is that most people who reach retirement do so as part of a couple, and with increasing life expectancies they may expect to remain as a couple for the majority of their retirement.

As such, this means that the rate for a couple may be the more relevant benchmark for many people.

If we look at the figures for couples, they are much less than double the figures for single people as there are some costs of running a home or paying bills which are similar whether there is one or two people in the household.

In the case of the ‘moderate’ threshold, the target is £43,000 per year for a couple, and this is significantly below the take-home pay of two people of working age, both on average earnings.

It is also only fair to say that the PLSA are entirely transparent about where their figures come from and what is included in their basket of goods and services.

For example, when it comes to holidays and leisure, the minimum standard includes just a week’s holiday in the UK, the moderate standard includes a three star fortnight in the Med, whilst the comfortable standard includes a better hotel, more spending money and several long weekends away over the course of a year.

This level of detail allows people to look at what is included and form their own judgments about what ‘good’ looks like for them – perhaps increasing the budget for some items and reducing it for others.

You do, however, raise an important point about the fact that these figures assume that the household is a homeowner who has paid off their mortgage.

Although this is the most common situation for pensioners, there are concerns that a growing number of people in future will need to fund a rent on top of their core living costs.

If this were to be the case then the target expenditure figures would be substantially higher and many more people would be set to fall short.

To be fair to the PLSA they do acknowledge this point and provide illustrative rent figures for households of different sizes in different parts of the country.

But there is no doubt that even a moderate standard of living in retirement represents a huge challenge for those who need enough income to cover a rent as well as all the other standard household bills.

I asked the PLSA for a response to your general point, and with particular reference to the fact that the threshold for ‘moderate’ retirement rose sharply in the latest version of these figures.

In addition to some of the points that I have made above, they told me:

‘After a period of higher than usual inflation, especially in prices of food and energy, the amounts required to fund these lifestyles have increased in recent years.

‘Additionally, these cost of living pressures saw the research groups consulted add extra financial support for adult children into the baskets for the first time, especially at the moderate level, driving an increase.

‘With inflation now off its peak, cost of living pressures easing somewhat and earnings increases outpacing the rate of inflation, we would expect the gap between the moderate level and average earnings to close over the coming years.’

In short, it is undoubtedly true that a single pensioner who attains the ‘moderate’ target shown in these figures will have a standard of living above the average person in work, especially if the person in work also has to fund a rent or mortgage.

But if our projected retirement income is short of this sort of level then we can either save more now, plan to work longer, or recognise that we may not be able to cover all of the items included in that basket of goods and services when we come to retire.