What does the cost of living crisis mean for your retirement savings?

With inflation at its highest level in 41 years and energy prices skyrocketing, the cost of living crisis has dominated headlines since inflation began to creep up from historic lows in mid-2021.

While the Covid pandemic began the inflationary increase, this was further exacerbated by the war in Ukraine pushing up energy and food prices even further.

Following such an extended period of price rises, you may be concerned about your household finances and long-term plans.

Rising inflation affects everybody differently depending on their circumstances. If you are approaching retirement, or have already retired, here are a few points to help you understand what the cost of living crisis means for you and some practical tips to help weather the storm.

What’s happening to interest rates and how might your pension be affected?
The Bank of England (BoE) is tasked with keeping inflation at the government-set target of 2%. Whenever it falls more than one percentage point above or below that target, the BoE must explain how they will address the difference.

In December 2022, they increased the base rate to 3.5%, which, in turn, will push up interest rates on the high street.

Higher interest rates will affect your pension differently depending on how it is invested:

  • If your pension is invested in the stock market, its value could drop since the stock market tends to go down when interest rates rise
  • If your pension, or some of it, is invested in bonds, its value could go up, since bonds can increase in value when interest rates rise
  • If you hold savings in cash, you are likely to get increased returns as high street banks pass on some of the increases in interest rates.

While current headlines are worrying, it’s best to tune out the noise and focus on your personal circumstances.

What is your personal inflation rate?
The UK inflation rate is measured by the Office for National Statistics (ONS), who monitor the fluctuating price of goods in an average shopping basket.

So, how you experience inflation depends on what you spend your money on.

For example, the ONS assumes that an average household allocates 9.8% of their monthly budget on a car or other vehicle. If you don’t own a vehicle, your personal inflation rate might be lower than average.

Understanding your personal inflation rate, by using an online calculator, allows you to make informed choices about how you allocate your monthly income and to locate possible savings.

In spite of inflation, here are three ways you can make your retirement income more sustainable.

Annuity rates have risen recently
If you’ve saved into a defined contribution (DC) pension scheme, you have a few different options for drawing an income. One is to buy an annuity that will guarantee you a certain level of income, usually for the rest of your life.

With yields on government bonds increasing, annuity rates have risen through 2022 and are currently enjoying a 14-year high. This means you can get a much higher income for the same level of initial investment than you might have before this year.

If you are approaching retirement or already in retirement and looking for ways to generate an income from your accumulated savings, annuities could be worth considering.

Maximising other savings accounts
If you’re about to retire, consider whether you have other savings that could provide an income before you start drawing from your pension. This would allow your pension to remain invested for longer, potentially generating bigger returns that, in turn, could provide a better income in the later years of retirement.

This could also help to reduce the Inheritance Tax bill after you die, since pensions usually fall outside of your estate.

Using cashflow modelling for greater understanding
We can help you forecast what your savings will look like throughout your retirement using cashflow modelling. When you know whether you’re likely to encounter a shortfall, you can create a strategy that will help protect you.

Ensure you also consult us on how best to invest your pension savings. Some pension providers automatically reduce the risk profile on your investments as you approach retirement. This is called “lifestyling” and isn’t suitable for everybody as it could harm your pension performance.

Get In Touch
If you’re worried about the rising cost of living and would like to discuss ways to protect your finances from the effects of inflation, we’re here to help. Please get in touch to arrange a time to chat.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
Past performance is not a guide to future performance and should not be relied upon.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Approved by The Openwork Partnership on 01.02.2023