Many rely purely on the State Pension but this is far too low to cover later life costs such as serious illness, long-term care and funeral expenses. Most pensioners don’t have enough savings to fund these expenses themselves.
Supporting younger family members and adapting your home for the demands of later life add to the squeeze on pension income.
One in four over 55s fear for their financial future as later life costs loom, according to exclusive research from Aldermore Bank.
While older people have average savings of £58,215, one in three either has no savings at all or less than £20,000.
Aldermore’s director of savings Ewan Edwards said later life costs can be steep, and often unexpected. “Building your savings early will soften the financial impact.”
The average Briton has put aside £1,292 towards their funeral, and more than half believe this enough. Yet funerals typically cost £4,056, according to the SunLife Cost of Dying report 2022.
Similarly, people have saved on average £1,134 towards helping children go to university or buy a property, but tuition fees cost up to £9,250 a year and the average UK house deposit is now £32,841, Edwards says.
Many underestimate the cost of adapting their home for later life, setting aside £955 while the Personal Social Services Research Unit reckons the cost can hit £16,647.
The biggest shortfall comes with long-term care. The average amount saved is £1,603 and one in five believes this enough but Edwards warned: “The average cost of residential care is now £667 a week. In three weeks, those savings would be gone.”
While Britons built up their savings during lockdown, now they are raiding them instead. Two years ago, 14 million Britons were failing to save anything, that has now jumped to a stunning 23 million, Aviva research show.
Those who are already retired face another challenge, which is to protect their income against rampant inflation, which is expected to top eight percent in April.
Cash in the bank is plunging in real terms as a result, said Becky O’Connor, head of pensions and savings at Interactive Investor. “Until interest rates on savings accounts are higher than inflation, they will represent poor value.”
Most retirees now keep their retirement savings invested through drawdown, rather than locking into an annuity. “This allows your money to grow but there is also the risk it could fall in a crash,” O’Connor warned.
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Andrew Tully, technical director at Canada Life, suggested combining drawdown with an annuity, to give you the ideal combination of security and inflation protection.
“An annuity gives you a guaranteed income for life, which you can use to cover your essential spending.
“Drawdown offers more flexibility over withdrawals, and hopefully your money will grow over time, to offset the impact of inflation.”
Today, a single man aged 65 with £100,000 can get level annuity income of up to £5,454 a year. That’s almost £1,000 more than last year, due to rising interest rates.
Chancellor Rishi Sunak is expected to restore the triple lock for 2023/24. The inflation element will be based on September’s figure, which is predicted to be 7.4 percent.
That should give pensioners some protection and Tully said: “With luck, today’s inflationary spike will soon fade.”