A saver who accumulates a pension pot of £80,000 to buy a level annuity will spend their entire monthly income (from private and state pensions) on basic living costs like food and fuel within 20 years of retirement, a study has found.

The calculations were done by Standard Life using  Office for National Statistics data and official Government inflation figures.

Andrew Tully, Senior Pensions Policy Manager, Standard Life, said: “The cost of living is rising fast for most people in the UK, but this is particularly acute for pensioners.  Their spending habits are driven by commodities such as food and fuel bills, and these inflation rates are much higher than the overall UK inflation rate.

“Pensioners relying on a fixed income will be feeling the pinch, with no sign of an immediate end to their misery.  If pensioner inflation remains at around 6% per year, people with a fixed income could lose as much as half of their spending power over as little as ten years."

The need to prepare for a long retirement and extreme old age has never been greater.

Unfortunately, people are rarely keen to think about how they will manage in old age, and when they do they dramatically underestimate how long they will live.

Research undertaken by Nottingham University Business School’s Centre for Risk & Insurance Studies found that, on average, people tend to underestimate how long they are likely to live by more than five years. Not unnaturally, people’s perceptions of their life expectancy affect their decisions on pension planning.

David Lamb, group business development director at St James’s Place Wealth Management, says: “People have seen their parents retire comfortably to spend their later years playing golf and travelling the globe. But that is unlikely to be how they will spend their later years unless they do some serious planning.

“Our parents had good pensions – from the state and often final salary pensions from employer schemes. That has all gone now. The age of the final salary pension is over. Even those currently in final salary schemes could see them closed or their terms altered before they themselves retire. You need to provide for yourself.”

Lamb cautions about being too confident about relying on individual assets.

“Property prices are already sliding, he says. “Anyone who has been reciting the mantra ‘my property is my pension’ is likely to be disappointed when they come to retire. You need to live somewhere, after all, and if you are determined to downsize, you may find that there is severe competition for smaller homes in desirable areas, meaning you don’t get much change from the sale of your current property. At present profits on the sale of one’s personal residence are tax-free, but who can say that they will always be?”

Lamb’s biggest fear is the return of inflation. “There’s no doubt that it’s on the way back. Inflation at 5% wipes out 40% of the value of your funds in 10 years – it is like paying higher rate tax twice.”

“Retirement planning is not necessarily pension planning. While a good pension scheme may be the core of your planning, to take advantage of the tax relief currently on offer on pensions schemes, the key to any successful financial planning is diversification of assets to make sure all your eggs are not in one basket. You can layer your solutions and create a balanced portfolio that suits your individual needs.”

How much do you need to save? Lamb adds: “A good rule of thumb is 25 times the sum that you think you will need, using present prices. This is a very imprecise figure, but very roughly takes into account tax, inflation-proofing, spouse benefits and other features you might need. Of course everyone’s needs will be different, but if you are wondering how much you need to save, just think that if you want £40,000 a year to live on at current prices you should be aiming to build a £1 million pension pot. Or to put it another way, your pension pot times 100 and divided by four will give you approximately the annual retirement income you can expect.

“The key is – start saving now and don’t let inflation and longevity catch you out.”

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