The cost of living crisis has been in the headlines a great deal of late. Global economies struggling with coronavirus recoveries have been hit by supply chain issues and the effects of the war in Ukraine.

With household fuel bills and petrol prices soaring, thousands of people took to the streets of London to protest the government’s lack of action in tackling the crisis. But there are steps you can take.

According to a recent MoneyAge report, less than 4 in 10 (37%) of the over-55s are factoring inflation into their retirement plans. And yet, if you are approaching or in retirement, the effects of inflation could be huge.

Choosing the right pension option, managing withdrawals, and budgeting for the whole of your retirement are all especially crucial during periods of high inflation.

Keep reading for five ways to factor the rising cost of living into your plans.

1. Taking a holistic look at your finances is key

Rising inflation affects the buying power of your pension pot. The current economic climate, though, makes it vital that you consider your pension as just one form of retirement income.

Volatility caused by Russia’s invasion of Ukraine could be having a short-term impact on your investments. So too could the continuing effects of the coronavirus pandemic, especially China’s current zero-Covid strategy.

At The Pension Planner, we take a holistic view of your finances, taking the whole of your financial position into account. This helps to ensure that we can build a plan aligned to your goals and risk profile, giving you your desired lifestyle in retirement regardless of what’s happening in the wider economic world.

2. Remember that some of your retirement income is already inflation-proofed

The State Pension rises each year in line with the highest of inflation, average earnings growth, or 2.5%. The State Pension triple lock helps to ensure that your income keeps pace with rising costs of living.

Ensuring you receive your full State Pension entitlement is an important part of your retirement planning.

The new State Pension for 2022/23 is £185.15 a week or £9,627.80 a year. To receive the full amount, you’ll need 35 “qualifying years” of National Insurance contributions (NICs). If you have less than 10 qualifying years, you won’t receive the State Pension at all so be sure to check your National Insurance record to see if you have any gaps and to work out what you might receive.

3. You can inflation-proof your private and workplace pensions

Choose an annuity at retirement and you’ll have a guaranteed income for life. As well as benefits like guaranteed payment periods and an annuity that continues to pay to your spouse after your death, you can opt for payments that rise each year to combat inflation.

An annuity can be regarded as an inflexible option. Once in payment, it can’t be cancelled or even amended, but this inflexibility also offers stability. You’ll have regular payments for life and this makes budgeting easier than managing flexible withdrawals or taking a lump sum.

A rising annuity is more expensive than a level one though, so the amounts you receive in the early years of your retirement will be lower.

4. Plan your flexi-access drawdown withdrawals carefully

Rather than receiving regular payments on a set basis, flexi-access drawdown allows you to take the amounts you choose, when you need them. This is much more flexible but means you’ll need to think carefully about budgeting, especially during periods of high inflation.

Despite the Bank of England’s recent rise to the base rate, it is likely your cash savings will currently be struggling to keep pace with inflation. This means your money is effectively losing value in real terms.

When you take flexible pension withdrawals or lump sums, be sure to plan ahead and take only what you need. Any money you withdraw that isn’t assigned to a specific expense will probably sit in your cash savings account where it will be losing real-terms value.

Any funds you don’t withdraw remain invested. And while there are risks attached to this – the value of your investment can fall as well as rise – investing gives you a better chance of making inflation-beating returns. You’ll also continue to benefit from the effects of compounding.

5. Remember that your outgoings in retirement won’t be static

Inflation decreases the buying power of your money over time and this becomes especially apparent throughout a 30- or 40-year retirement.

Budgeting for your desired lifestyle over decades isn’t easy. You’ll need to think about the type of retirement you want, how long it might last, and how your outgoings will shift as you get older.

Lower travel expenses or decreased costs after downsizing could be outweighed by higher fuel bills and the potential costs of later-life care.

We can help you decide on how much is “enough”, using our sophisticated cashflow modelling software to factor in potential future changes in your circumstances and the wider economy.

Get in touch

If you’re worried about the impact of inflation on your long-term retirement plans, get in touch. Email info@thepensionplanner.co.uk or call 0800 0787 182.

Please note:

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.