How inflation is helping drive up the cost of your retirement – and what to do about it

Published on February 20, 2023 by Andrew
Balloons tied to the open boots of cars

After rising to a 40-year high of 11.1% in the 12 months to October, inflation may now have peaked. According to the latest figures from the Office for National Statistics (ONS), December’s inflation figure was 10.5% – well above the Bank of England’s (BoE) 2% target.

And while the Consumer Price Index (CPI) is expected to drop sharply from the middle of this year, it won’t return to the BoE’s target for some time yet, possibly even into 2025.

High inflation has had a huge impact on household shopping bills and has seen the “real terms” value of cash savings fall. 

According to the latest Retirement Living Standards report from the Pensions and Lifetime Savings Association (PLSA), it could also have seen the “minimum” cost of retirement rise by almost 20%. 

But what does that mean for your retirement plans and how you can protect your retirement fund from the effects of inflation?

Keep reading to find out.

Inflation may have peaked but the minimum cost of retirement has soared 

UK inflation began to rise back in 2021 when the end of coronavirus lockdowns coincided with a global supply chain crisis and a national labour shortage. China’s zero-Covid stance and Russia’s decision to invade Ukraine also affected global markets.

The result was rapidly rising inflation.

Source: ONS

The BoE predicts that inflation is now set to fall sharply from the middle of the year. It is expected to reach 2.2% by Q1 of 2025.

Prices are likely to remain high for some time, while the damaging effect inflation has on your pension savings is here to stay too.

The PSLA reports that the minimum cost of retirement has risen by 18% for a single person and 19% for a couple.

The organisation defines a “minimum” retirement living standard as not just surviving but living with dignity. 

This includes participation in social, cultural, and leisure activities, £96 a week for a couple’s food bill, a yearly UK holiday, and a meal out once a month. It does not include running a car.

Source: PSLA

The costs of living a “moderate” and “comfortable” retirement lifestyle have also increased – for single-person households and couples – by an average of around 11%.

A comfortable retirement for a couple is said to include luxuries like theatre trips and a three-week European holiday, a £238-a-week food bill, and two cars, each replaced every five years. The cost of this retirement lifestyle has risen by almost £5,000 a year for a couple as inflation has rocketed. It now stands at £54,400. 

According to FTAdviser, this level of comfort would require a retirement pot of around £645,000 although it is important to remember that these lifestyles and amounts are only guides.

High inflation decreases the buying power of your pension fund but advice can help

With inflation above 10%, the money held in your pension pot won’t go as far as it might have done. But there are steps you can take to inflation-proof your retirement and advice can help you decide on the right approach for you.

Here are three points to consider:

1. Revisit your household budget and remember your personal inflation rate

At the end of last year, you might have read Understanding your personal inflation amount in which we looked at how different spending alters the inflation you experience.

Poorer households, for example, relying on grocery essentials like pasta, vegetable oil, and tea would have seen their bills rise by the highest percentage. That’s because the price of these food items increased the most.

For households living a comfortable lifestyle, the biggest rises might have been fuel – especially where a family is running two cars – and the cost of airfares.

Household budgeting is key. Make a list of incomings and outgoings for a month and you’ll immediately see where savings could be made. 

2. Remember that your State Pension is already inflation-proofed

While inflation is currently high, remember that your State Pension is already inflation-proofed thanks to the State Pension triple lock.

Jeremy Hunt used his autumn statement to confirm that the State Pension would increase from April 2023 by 10.1%. 

From 2023/24 the full new State Pension will be worth £203.85 a week, or £10,600.20 a year. 

While the State Pension might not be your main source of retirement income, the regular, known amount can be useful for covering fixed expenses.

3. The retirement option you choose is important so seek advice

At The Pension Planner, we can help you choose the retirement option that is right for you. 

You might be looking for the flexibility of drawdown or the stable income of an annuity. It isn’t an easy decision.

A recent FTAdviser report claimed that “annuities are back”, with rates reaching a 14-year high. Nearly 1 million pre-retirees are thought to be considering an annuity, drawn to its reliability in a volatile economy. One downside though, is that once purchased, your annuity can’t be changed. 

Drawdown, on the other hand, leaves your unused funds invested and so liable to the ups and downs of the market. 

You might find that a mixture of both an annuity and drawdown is the right option for you.

Get in touch

High inflation might be falling but it is here to stay for the next few years and that could see the cost of your retirement increase by as much as a fifth. 

The Pension Planner can help. If you are worried about high inflation or have a question about any other aspect of your long-term retirement plans you need help with, get in touch. Email 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. 

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