“Will rising inflation affect my retirement?”
As you’ve probably heard, inflation (or the “cost of living”) has been rising at a faster pace than normal recently. If you’re retired (or close to retirement), inflation can have a big impact. It’s important to understand how it could affect your lifestyle now and in the future.
Why inflation is important if you’re a retiree
The Bank of England (BoE) aims to keep inflation at 2% a year. However, according to the Office for National Statistics, the rate of inflation in the 12 months to March 2022 was 7.0% (and is projected to rise further). While the effect of inflation can seem small day-to-day, it adds up.
If you’re already retired, you may need to reconsider how you will use your savings to fund retirement. Drawing a higher income now to meet rising costs could mean you face a shortfall in the future.
Traditionally, pensioners spend a larger proportion of their income on energy and food - two of the areas that inflation has affected the most.
Whilst the State Pension rose in April, the government decided to suspend the ‘triple lock’ guarantee. For the 2022/23 tax year, the State Pension has increased by 3.1% - significantly below the current rate of inflation.
According to the Centre for Economics and Business Research, the gap between the State Pension increase and the current pace of inflation will mean pensioners are £169 a year worse off in real terms.
So, if you are retired, what can you do about inflation?
5 things retirees should do to manage the effects of inflation
1. Review your income needs
Looking at how your expenses have changed over the last few months can help you create a realistic budget. Does your current income still allow you to live the same lifestyle, or have you had to make adjustments? Looking at which outgoings have increased can help you see if you need to make any changes.
2. Check your reliable sources of income
As part of your retirement income, you may have some sources that provide a reliable income. You should review these and check if they’ll increase in line with inflation in the new tax year.
As mentioned above, the State Pension has risen but not at the same pace as inflation. You may also have a defined benefit (DB) pension, which pays a guaranteed income throughout retirement. A DB pension will often increase at the same pace as inflation, providing you with some financial security even as the cost of living rises.
If you had a defined contribution (DC) pension, you may have chosen to purchase an annuity that will pay an income for the rest of your life. When purchasing an annuity, you can choose whether the income will increase in line with inflation.
3. Assess investment performance if you’re using flexi-access drawdown
If you have a DC pension, an alternative to an annuity is flexi-access drawdown. This option allows you to take a flexible income, with the rest of your pension usually remaining invested. As a result, the remainder of your pension may increase to keep pace with inflation depending on how the investments perform.
In addition to investments held in a pension, you may also have a separate investment portfolio that could deliver growth that matches or exceeds inflation.
Investing can provide you with a chance to grow your wealth, but you should keep in mind that returns cannot be guaranteed.
4. Review your cash savings
Some cash savings are important as they can provide a valuable safety net if you face an unexpected expense. However, as inflation is likely higher than the interest rate you are earning on your cash savings, the value of your savings could be falling in real terms.
In some cases, moving the money to a different account or investing a portion of the savings can help you reduce the effects of inflation on your wealth, although you will lose the capital security of your deposit holdings. Investments carry risk.
5. Arrange a meeting with your financial planner
If you’d like help in understanding how inflation is affecting your income now, and the effect it could have in the future, a meeting with a financial planner can help. Please contact us to discuss your income needs and what you can do to protect against the effect of inflation.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
