3 ways to successfully manage your retirement when inflation is high

Category: News

The UK is in the midst of a cost of living crisis, with fuel and energy bills soaring. The Office for National Statistics (ONS) confirmed in March that inflation had risen to 6.2%, its highest level for 30 years.

The Bank of England (BoE) reports that inflation – exacerbated by Russia’s invasion of Ukraine – could peak at around 10% later in 2022, with a return to the BoE’s 2% target unlikely before 2024.

While a period of high inflation should have little bearing on your financial aspirations in the long term, in the short term, revisiting your household budget could help. You’ll also need to look at how you manage your retirement income.

Here are three ways to manage your pension withdrawals effectively during periods of high inflation.

1. Withdraw only what you need

Inflation increases the cost of the goods you buy, leading to increased household expenditure. As a retiree, you might be tempted to increase your pension withdrawals to compensate, allowing you to retain your current lifestyle despite the additional costs. This won’t always be the best option.

Inflation reduces the buying power of your pension pot, meaning that by withdrawing more, you are asking your money to go further. This could diminish your fund much more quickly than you anticipated and planned for.

The Consumer Price Index (CPI) is based on the price of a basket of goods, broadly reflective of UK household spending habits. Rising inflation won’t necessarily increase your monthly spending by exactly 6.2% so keeping an eye on your budget is crucial.

Increasing your regular withdrawals without being sure of your outgoings could see you taking out more than you need. Excess funds that you don’t immediately spend are likely to sit in your cash savings account. During periods of high inflation, this is potentially bad news.

With interest rates low (despite the BoE’s recent base rate rise), your cash savings will be struggling to keep pace with inflation and will be effectively losing value in real terms.

Depending on the retirement option you have chosen, taking smaller withdrawals could leave the largest possible amount still invested in the fund, and so with the potential for further investment growth.

2. Make use of other income streams

At Lloyd O’Sullivan, our holistic approach means that the financial plan you have in place considers all of your potential income streams in retirement. This includes pension and non-pension funds.

This could include investment income from ISA holdings or the regular rent from buy-to-let properties. You might also have State Pension income, a reliable and regular payment that already has in-built inflation proofing, in the form of the triple lock.

If you have a defined benefit (DB) scheme, you might also find that this increases each year to combat inflation.

Make use of the other income streams you have available to you and turn to your pension last. You may find that you can reduce your withdrawals in the short term, or not need to take pension income at all.

If you are not yet retired but are considering your defined contribution (DC) pension options, it’s worth noting that you could opt for an annuity that rises annually. You usually have a choice of escalation amount.

While an annuity that increases each year will help to maintain the buying power of your regular pension income, the cost of rising payments means that the amounts you receive initially will be lower.

3. Consider postponing your retirement

If your chosen retirement date is approaching, take a closer look at your income and outgoings.

While a robust long-term plan means you shouldn’t need to make any changes, you might consider a brief postponement – or a move into phased retirement.

Your plans may have been in place for a long time, but that doesn’t mean that they need to be set in stone. You’ll need to weigh up your options to decide which offers the most long-term stability, and we can help with that.

Get in touch

With inflation well above the BoE’s 2% target, and further rises predicted, you’ll need to measure the impact of inflation on your financial plans over the next year or so.

While the current economic climate doesn’t automatically mean that your plans need to change, it might pay to keep a closer eye on your household spending and pension withdrawals to ensure your financial position remains stable.

If you have any concerns about the effect of rising inflation on any aspect of your finances, please get in touch. Email info@lloydosullivan.co.uk or call 020 8941 9779.

Please note:

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.