Can you picture your retirement?

The Pensions and Lifetime Savings Association (“PLSA”) has undertaken research to determine the annual expenditure that an individual or couple would need to have to live securely in retirement, across a range of lifestyles and regional disparity (in collaboration with Loughborough University). The PLSA have created a website as a useful guide which assesses a range of factors including housing, transport and holidays to live at a ‘Minimum’, ‘Moderate’ or ‘Comfortable’ living standard. Each standard is based around a basket of goods and services, taking into account different circumstances (such as living as a single or couple, and inside or outside of London).

Approximately 77% of individuals don’t know how much they need in retirement, and only 23% are confident that they are saving enough for retirement (based on the survey done by PLSA in 2019), and therefore these Standards have been developed with the aim of helping savers to understand the annual expenditure needed (not just gross income) to maintain their desired standard of living in retirement.

Minimum: £14,400 expenditure per year for an individual, £22,400 for a couple. This Minimum standard of living assumes that this would cover all your needs, with a little disposable income left over. If you are based in London, this would increase to £15,700 and £24,500 respectively, to account for the heightened cost of living. This could include around £50 a week on groceries, or a week long UK holiday and up to £630 spending on clothing and footwear each year. However this excludes provisions for a car, or full refurbishment of your property.

Moderate: £31,300 expenditure per year for an individual, £43,100 for a couple. This Moderate standard assumes more financial security and flexibility. If you are based in London, this would increase to £32,800 and £44,900 respectively. This includes provisions for a holiday abroad, in addition to £1,500 on clothing spending plus a small car replaced every 3 years.

Comfortable: £43,100 expenditure per year for an individual, £59,000 for a couple. This Comfortable standard allows for more financial freedom and some luxuries. If you are based in London, this would increase to £45,000 and £61,200 respectively. This could include replacing a kitchen and bathroom every 10/15 years (depending on if you’re an individual or a couple), more luxurious holidays and greater flexibility on food spending and helping others such as family support.

The graphic below summarises the total expenditures for an individual and a couple at the varying levels, including the adjustments made for London. By using these figures as a benchmark, this can guide savers to develop personal targets for saving ahead of retirement, based on their individual circumstances and aspirations – including guidance on how much to contribute to a DC pension to meet the differing living standard levels. The full state pension for 2024-25 is £11,500 per year (source PLSA), and therefore it is crucial that individuals plan for retirement on top of this in order to achieve their desired standard of living. The link to the Retirement Living Standards PLSA website is here should you wish to understand the expenditure summaries.

This also includes further information on how the research was conducted and contains individual case studies which may be a useful reference.

Source: PLSA Retirement Living Standards

 

The Noise

• The European Central Bank left interest rates unchanged as expected this week, keeping its deposit rate at 3.75% following a 0.25% reduction at its previous Monetary Policy Committee meeting. ECB president Christine Lagarde did however say September’s meeting was “wide open”, as it downgraded its view on the euro zone’s economic prospects. Lagarde’s comments reinforced expectations that weak activity will continue to dampen price pressures in the economy, perhaps allowing the ECB to cut rates once each of the next several quarters. Following the meeting, the Euro fell against the US dollar, a day after hitting a four-month high. Markets are pricing in up to two ECB rate cuts for the rest of 2024, a view that is yet to be challenged by policymakers.

• UK pay growth excluding bonuses grew by an annual 5.7% in the three months to May, down from 6.0% in the three months to April. The fall was as expected and marked the slowest pace of growth in almost two years, the latest signs of a cooling labour market, though perhaps not cooling enough for the Bank of England. While wage growth higher than inflation is good news for many households after years of stagnant incomes, the current level of wage growth will likely reduce the chances of an interest rate cut at the next meeting in August.

• Global electricity demand is set to grow at its fastest rate in nearly two decades this year, driven by rising demand for air conditioning as temperatures rise. The report published by the International Energy Agency, explained that growing air conditioning demand is pushing energy grids to maintain a reliable baseload supply. As a result, energy grids have been forced to continue using coal power despite plans to phase it out, even as renewable energy production increases. Global power consumption is expected to grow 4% in 2024, which would be the largest growth rate since 2007. Total renewable generation is forecast to overtake coal-fired electricity output in 2025, as a result, carbon emissions from the global power sector are plateauing and expected to fall in the coming years.

 

The Numbers

GBP Performance to 18/07/2024

Equity GBP Total Return	1 Week	YTD
MSCI ACWI	-1.3%	12.0%
MSCI USA	-1.2%	14.5%
MSCI Europe	-1.3%	6.3%
MSCI UK	-0.3%	8.5%
MSCI Japan	-2.1%	9.5%
MSCI Asia Pacific ex Japan	-1.7%	9.3%
MSCI Emerging Market	-2.1%	8.1%
MSCI EAFE Index	-1.3%	7.1%
Fixed Income GBP Total Return
UK Government	0.4%	-1.5%
Global Aggregate GBP Hedged	0.3%	1.2%
Global Treasury GBP Hedged	0.3%	0.8%
Global IG GBP Hedged	0.2%	1.5%
Global High Yield GBP Hedged	0.2%	5.0%
Currency moves
GBP vs USD	0.2%	1.7%
GBP vs EUR	0.0%	3.0%
GBP vs JPY	-0.7%	13.4%
Commodities GBP return
Gold	1.0%	16.6%
Oil	-0.2%	13.7%

Source: Bloomberg, data as at 18/07/2024

 

The Nuance

UK annual inflation was steady at 2% in the 12 months to June, defying forecasts for a slight fall to 1.9%. Strong underlying price pressures prompted investors to pullback bets that the Bank of England will cut interest rates at the start of August. Significant increases in hotel prices contributed to the higher-than-expected reading, highlighting the Bank of England's concerns about inflationary pressures in the services sector. This marked a third consecutive month where services CPI beat expectations.

Britain’s once developed-market-leading headline inflation is now lower than the United States and euro area. However, core inflation (excluding food and energy) remains higher as it held steady at 3.5%. Following the data release, market implied rate cut expectations for August fell to 35% from just under 50% before the data.

Pound Sterling hit its highest for nearly two years against the euro, and around one year against the dollar following the latest inflation data. The reduced likelihood of an August rate cut fuelled the new highs, as investors seek the best deposit returns in the face of global interest rates cuts. Unlike the Euro and the dollar, the Pound has benefitted from stable domestic politics, getting a boost from a new government that many hope will bring more predictability policies and less volatile markets.  

All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.