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Could you live on the state pension?

At one time, retirement meant that one day you would be employed at the place you probably had been for all of your working life, and then, following the presentation of a timepiece, warm handshakes and good wishes from colleagues, the next day you would be at home, retired with a “nice pension” and the leisure to do whatever you wanted.

For many people there’s a gap between the dream of retirement and the reality they face. As the “good old days” seem to be gone forever, people today need to take charge and plan for their own retirement security - and the sooner, the better.

Research from Friends Provident has found that people consider that the average monthly amount considered enough to live a “comfortable retirement” (excluding rent or mortgage payments) is £832 – or £208 per week. This is a lot more than the full basic state pension currently provides, which is £95.25 a week for a single person increasing to £97.65 in April.

For a married couple or civil partnership this is currently £152.30 rising to £156.16 in April. Not only that, but these amounts depend on the number of “qualifying years” you’ve worked - the years you earned enough to have been paid or credited with National Insurance contributions. If you don’t have the maximum, you will only be entitled to a lower amount based on the number of qualifying years on your record.

Yet in the study, more than half said they plan to solely or partly use the state pension to fund their retirement. When you also take into consideration that National Statistics show that the average weekly wage in the UK in 2009 was £489, the reality of retirement is going to hit many of us hard.

In November 2009, AXA recruited 14 volunteers to live for a week on the state pension. Aged between 26-40, with varied occupations including a professional rugby player, journalist, stay-at-home mother, company director and an MP, the volunteers had to agree not to work for the week while they lived on the basic pension and to keep a diary of their progress.

Participants had to disregard any food and toiletries in the house or petrol in the car and start from scratch. Anything they did during the week had to be paid for out of their pension income and could not be supplemented by their savings or salaries. Deductions were also made from their £95.25 weekly income (2009 figures) to take into account the cost of gas and electricity, insurance, mobile phones, cable TV and car usage.

Costs were averaged over the year to give a weekly sum, which left the volunteers with amounts ranging from £72.54 to a meagre £34.17 to live on for the week. All but a few managed to make their money last - but not without forsaking the lifestyle they were used to. With everyday items no longer affordable and spending habits and lifestyle choices changing to fit within an allocated budget, boredom set in and the loss of independence, isolation and loneliness began to take over. Living on a state pension may be possible for a week but the reality of long-term life as a pensioner hit the participants hard.

One of them - who had less than £1 remaining after the week after spending £26.38 on food, £9.60 on petrol and £4.60 on pet food - had little sympathy for her plight on her Facebook page:

“People who live on this level of income all the time have got in touch to highlight how it’s much easier to live like this for a week than long-term.” she said. In conclusion, she added “This week has had a dreadful impact on my social life. What struck me most is that you can’t save anything, there’s no financial slack for little luxuries. It’s a cliché but life isn’t just about surviving, it is also about living and the basic state pension doesn’t allow you to do that”.

The prospect of living on such small sums after a hard working life is not a happy one. After all, your retirement years are supposed to be about you, and doing all those things you wanted to do but couldn’t because of work constraints.

If you would like to enjoy a similar standard of living in retirement as you do now, you will need to plan for it. A pension plan is one way of helping you do this, and generally, the earlier ystart making contributions, the better. Even though retirement might feel so far away and you’d rather be spending your money on other things right now, putting a relatively small amount of money to one side each month will soon mount up.

It’s never too early to start thinking about your future, and the earlier you start saving the bigger your pot. Everyone wants to make their retirement years comfortable and secure. Let us help you calculate how much you can expect to get at retirement, and how much you might need to pay in to a pension plan to get the level of income you want in retirement.

This article was taken from Seneca Reid's Summer 2010 newsletter.

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