The rise in the cost of living, your pension & retirement

rise in cost of living pension

Over the last 15 years, the UK economy has suffered a handful of significant blows; the 2007-09 financial crisis, Brexit, the pandemic and most recently, the Russia-Ukraine war. And whilst household incomes face their own shock, continuing to be squeezed with the rise in the cost of living, your pension and retirement could suffer from short-sighted spending decisions and ill-thought-out plans. We explore the potential impact of the current economic climate on pension savings and your future retirement.

74% of those aged over 55 consider rising bills to be their biggest worry

A recent research study commissioned by Cushon revealed that nine in 10 people are struggling due to the cost-of-living crisis. One of the largest concerns is the impact of people stopping their pension contributions and no longer being able to save. Taking a break from pension savings could have a lasting impact on your future pension income and your retirement plans. So, what can be done? Are we heading towards poverty in retirement?

Inflation shock – the rise in the cost of living and your pension

Only 2 out of 5 people aged over 55 have planned for the impact of inflation

Inflation hit a 30-year-high of 9% in May, and many expect the base interest rate to rise shortly too. The true “inflation shock”, however, is being felt by those close to retirement or those who have recently retired. 36% of people over 55 have not factored in inflation to their retirement plans, which affects how they manage their retirement income.

Although the current volatile economic climate is generally causing people to take a more considered approach to their retirement plans, the day-to-day impact of inflation is being missed. A study conducted by Key Later Life Finance suggests a third of those interviewed believed their company pension or state pension would rise in line with inflation. But the key here is to factor in the impact of inflation on your daily spending and household bills.

A financial plan can help with this. At Balance: Wealth Planning, we take a long-term view on inflation, using data from the past 20 years when formulating a plan which accounts for periods of inflationary peaks and troughs. In addition, we update our cashflow assumptions annually, so if inflation requires updating, we will do so.

It can be worrying when you see the costs of things rising, especially after a long period of such low inflation. And whilst a cashflow plan can never be 100% accurate all of the time, it’s there to provide you with peace of mind when things outside your control happen.

Avoiding poverty in retirement

54% of the UK no longer feel they can save in the way they would like

As inflation erodes the value of money over time, it is important to check how the rise in the cost of living will affect your pension plan and your savings and investments. Whilst it might be tempting to cut your expenditure, pausing your pension contributions could prove a dangerous strategy and leave you with a large shortfall in your future pension income. It can be easy to make decisions thinking only of the immediate short-term, forgetting about what that might mean for the longer term; when you can no longer work, you will need your pension income to support you through retirement.

An example given by Aegon suggests that a one-year break from a workplace pension for a 25-year-old on average earnings could cause them to miss out on £4,600 when they reach State Pension Age. They would also miss £683 of employer contributions for that year. Increase that break to two or three years, and the shortfall rises to between £9,100 and £13,600 of missed pension income in the future, which is not small change!

Pension and retirement planning is key

58% – average shortfall on pensions savings for those aged 50 – 64

A “triple whammy” of rising inflation, frozen income tax thresholds, and increased national insurance is forcing people to rethink their savings strategy and consider a pension break. If you’re under 55, this might seem like a viable option, but the less you contribute to your pension today, the bleaker your future could be. And remember that you get tax relief on your pension – a government bonus of at least 20p for every £1 contributed.

You might be able to get extra value from certain payroll-pension options like a “salary sacrifice” scheme. This is an easy way to save national insurance and make your money go further, keeping your pension topped up for your future retirement.

We strongly urge you not to stop your pension contributions until you have discussed your finances with our financial planning team. Inflation is factored into our cash flow forecasts using a long-term view, and we always carry out a stress test of our clients’ plans.

By factoring in different scenarios and any spikes in spending, we can ensure your financial plan will withstand all eventualities, both now and in the future. Reassuring you that your hard-earned savings and pension contributions will be future-proofed so that you can look forward to a financially secure retirement.

If you’re worried about the impact of the rise in the cost of living on your pension and retirement plans, please get in touch with our independent financial planning team.