Whether it is the Average Earnings Increase, Retail Price Index (RPI), or Consumer Price Index (CPI), I, like many home owners, have an important interest in The Real Cost of Living Index.
Rising food and fuel prices as well as increased taxes and other household bills mean the average family must cope with inflation that is twice as high as official estimates.
Everyone uses electricity and bills have risen by an average of 19 per cent over the year. A shopping basket of selected goods in May 2007 cost £41.34. A year later this has increased to £49.24, an increase of a 19.1 per cent.
It would be rude not to include a few beers and a couple of bottles of wine. Last year these would have cost £16.74. This year you are talking about £19.42, which is an increase of 16 per cent. Doesn’t this quantify the real cost of living rather than the CPI?
Neither does the CPI include council tax or mortgage costs, another outgoing that seems to be spiralling out of control for many people. A subject for another time!
To compound the problem we are being told that a single person in Britain needs to earn £13,400 per annum before tax to provide a minimum standard of living. A couple with two children need to spend £370 per week and the pensioner couple £201 per week.
These figures are based on the spending power needed for survival. But more than just food, clothes and shelter are needed to have the opportunities and choices necessary to participate in society.
These factors are different for each and every one of us. For a single person it may be a mobile phone or a bike, for a pensioner, the occasional carvery meal and for families, the chance to have a one-week self catering holiday in the UK. Understand the concept of living life to the full and live for today but shouldn’t we have one eye in the future? Within the items of expenditure there doesn’t seem to be any reference to saving for your future.
It is a retirement goal of many to maintain their standard of living in retirement but how? The current basic state pension for a married couple is £145.05 per week, some £65 per week short of what today’s pensioner needs.
For the rest of us there is a message that the state pensions system is significantly underfunded and is going through significant changes. Yes they are reducing the number of qualifying years to 30, however, you will have to wait until you reach age 68 to claim the benefit.
In addition to this we are living longer and healthier lives and this has to be catered for within our funding for retirement.
As a nation we‘re not great savers. Excluding the money we fund to a pension whether it be private or through an employer’s scheme (the latter often being conditional), the nation has a negative savings gap.
Basically we are spending more than we are earning. I cannot see people’s standard of livings reducing – the money we save is going to have to last a lot longer if we wish to retain our current lifestyle. A male age 40 funding £100 per month gross in to a pension until age 65 could expect to receive a pension of £4,576 per annum at age 65 assuming a growth rate of seven per cent. If the individual starts ten years later the projected pension at age 65 is £2,000 per annum.
This identifies a significant shortfall for income in retirement and demonstrates the need to start funding pensions early.
Trevor Law is a director with Montpelier Group (Europe) Ltd, the privately-owned independent financial advisers located at Barston near Solihull. E mail: TILaw@montpeliergroup.com