Housing and fuel costs are the largest single expense

The figures show that household costs fluctuate over time, with annual costs peaking at £45,000 when the head of the household is aged between 30 and 49, reflecting the costs of raising children.

 

By comparison, pensioner household expenditure drops to £25,000 a year when the head of the household is aged between 65 and 74, and to £17,000 for those aged 75 and above.

Digging deep

These figures show a gulf of more than £14,000 annually between income and expenditure in the early years of retirement if the householders rely solely on the Basic State Pension. This pays just £10,310 [2] a year currently to the average retired household. To make up the difference, pensioners will have to dig deep into their savings or personal pension plans, unless they simply choose to go without.

A comfortable retirement

Saving as much money as possible from early in working life is key to being able to supplement the State Pension and ensure sufficient income to live a comfortable retirement. The analysis shows that the average household spends £230,000 on recreation and £128,000 on hotels over the course of a lifetime, so by tightening their belts a little, people could afford to save more towards retirement.

Although living costs do fall as people reach their twilight years, health costs tend to increase, so the average household costs are nowhere near covered by the State Pension, even in households with two pension incomes.

Reducing tax liability

The Prudential analysis also reveals that the lifetime cost of people’s direct taxation (income tax and national insurance contributions) is £385,000 for the average household.

Saving into a pension scheme can also be an excellent way of reducing tax liability as basic-rate taxpayers can claw back 25 pence in income tax relief for every pound they save into a pension, and for high-rate taxpayers this rises to 67 pence in the pound.

Interesting insight

Prudential’s analysis reveals that housing is the single largest expense for a typical UK household, with mortgages, rent, repairs, energy and council tax costing on average a total of £508,000 over a lifetime.

The figures also provide an interesting insight into how State provision in the UK shapes the way households spend their money over the course of a lifetime. Services provided by the State in the UK account for some of the least expensive lifetime costs for households, for example, the average UK household spends just £364 a year on education, and £343 on healthcare. The expenditure in these two areas combined stands at only £44,000 over the course of a lifetime. Recreation and culture is the second largest expense (£230,000), a reflection of the relatively high quality of life enjoyed by many people in the UK.

[1] All costs based on household expenditure as recorded in the ONS Family Spending Report, for a period of 62.1 years, based on an average UK life expectancy of 80.1, as estimated by the United Nations Department of Social and Economic Affairs. Please note that children’s living costs are assumed to be paid by their parents/guardians up to the age of 18, to avoid double counting. All expenditure figures are rounded to the nearest £1,000.

[2] Based on the annual state pension of £5,728 and 1.8 persons in the typical retired household, as recorded in the Family Spending Report.