Some of the biggest costs of retirement are those that people don’t think about or prepare for, experts have warned

Millions of people are under-saving for retirement, new figures suggest – but experts warn there are number of “hidden costs” of retirement that even the most diligent savers may not be prepared for.

The Government estimates that almost 15 million people are not saving enough to live on in old age, with retirees in 2050 on course to receive £800 less private pension income than today’s.

This situation is being made worse by increasingly expensive costs linked to retirement such as moving into care homes or retirement villages, which come with hefty charges.

The i Paper has examined some of the biggest hidden costs of retirement and how you can prepare for them.

The cost of care

The average cost of residential care – where you move into a care home – is around £949 per week, according to Age UK, while living in a nursing home – which provides more round-the-clock care – costs around £1,267 per week.

Over a single year, this could leave retirees facing a bill of up to £65,884. Assuming you lived for just three years in this set-up, you would fork out almost £200,000.

It typically costs £25 per hour to receive care in your own home, so assuming you receive care for around 26 hours of per week – the average, according to Just Retirement – it would cost you £650 a week, or £33,800 a year.

Greg Moss, a chartered financial planner at Eleven.2 Financial Planning, said it’s a good idea to at least make sure you have some accessible cash to pay them at the beginning.

“The worst situation to be in is having a house, but no cash or investments to meet the cost or care,” he said.

“You could end up having to sell your property below market value, while getting into debt. It’s a horribly stressful situation to be in.

“The main thing to do is make sure you have enough liquid assets (easily accessible money) to fund care in the early stages. This will give you time to adjust your plans.”

Natasha Etherton, chartered financial planner at Evelyn Partners, added that you may be able to take out an “immediate needs” annuity to fund care costs.

“These are an insurance product that pay your care fees for the rest of your life, and they’re available to anyone who is receiving care either in their own home or in a care home and is liable for paying for it,” she explained.

“However, they are only available through accredited financial advisers.”

Retirement village fees

Retirement villages are becoming an increasingly popular choice for pensioners looking for an easier life.

These sites usually offer single-storey accommodation and include a number of communal services on site, such as restaurants and hair salons.

But the fees for these properties can be extortionate. The average monthly service charge for a retirement property is £523.99, according to data from The Homeowners Alliance. That adds up to over £6,200 in fees per year.

One of the particularly sneaky costs of these homes, though, is the costs when you come to sell. These are more likely to fall onto relatives who are tasked with selling the property once you die.

Exit fees are typically around 12 per cent of the property’s sale price, according to Leasehold Knowledge Partnership, but in some cases they are as much as 35 per cent.

On a home worth £400,000, a 35 per cent exit fee would be £140,000. This could leave dependents with considerably less than they might have been expecting.

Angela Kerr, director at The Homeowner’s Alliance, said: “Make sure you do your research on potential fees, when you or your family may pay them and how much they will amount to.”

Funeral and end-of-life costs

One cost you may not have thought about is the cost of your own funeral – but if you don’t have enough money set aside, your loved ones could end up forking out thousands of pounds.

The average cost of a funeral in 2024 was £4,706, according to data from Legal and General – an increase of 5.75 per cent on 2023. Burials tended to be more expensive than cremations, typically costing £5,894.

Mr Moss said people often underestimate this cost and assume their loved ones will be able to fund it out of their estate – but it isn’t always this straightforward.

“Funds can’t be distributed from your estate until probate is granted, which could take months, so your executors may have to cover your funeral themselves and be reimbursed from your estate later.

“This is why prepaid funeral plans are popular. Banks are also getting better at settling funeral costs directly before grant of probate, so their bereavement team may be able to help if access to funds is an issue.

“Otherwise, the best thing you can do is leave your estate in good order so your executors can distribute assets as quickly as possible. Making sure you have an up-to-date will is the most important thing.”

Prepaid funeral plans can help cover these costs, but make sure you use a firm which is regulated by the Financial Conduct Authority. This ensures your money is protected if the firm goes bust.

Downsizing premiums

Some people may be relying on selling their property and downsizing to fund their later life.

But bungalows and retirement properties are in high demand because of their accessibility, meaning they tend to be expensive for their size and you won’t get as much as you may have expected, so it’s worth factoring this in.

Ms Etherton said: “Downsizing to make later life easier would ideally free up funds, but it might not always do so.

“Often a bungalow or nice apartment in your local area comes at a premium, so that after tax and legal and moving costs, you might not bank a large windfall for later life.”

Ongoing housing costs

An increasing number of people are still renting or paying off mortgages in retirement, and this figure is set to keep growing.

The Pensions Policy Institute estimates that if current trends for home ownership for 45-64 year olds were to continue into retirement, around 17 per cent of retirees, or 1.2 million people, will be living in private rented accommodation by 2041, compared with 6 per cent today.

Laura Suter, director of personal finance at AJ Bell, said: “On top of this, a growing number of people are taking out ultra-long mortgages amid a backdrop of higher interest rates that will see people paying the debt off into retirement.

“Take some time to think about whether it’s likely you’ll still be paying for housing or rental costs in retirement and factor in any monthly outgoings alongside your everyday spending.”