With inflation at its highest level in 41 years and energy
prices skyrocketing, the cost of living crisis has dominated
headlines since inflation began to creep up from historic
lows in mid-2021.

While the Covid pandemic began the inflationary
increase, this was further exacerbated by the war in
Ukraine pushing up energy and food prices even further.

Following such an extended period of price rises, you
may be concerned about your household finances and
long-term plans.

Rising inflation affects everybody differently depending
on their circumstances. If you are approaching retirement,
or have already retired, here are a few points to help you
understand what the cost of living crisis means for you
and some practical tips to help weather the storm.

What’s happening to interest rates and how
might your pension be affected?

The Bank of England (BoE) is tasked with keeping
inflation at the government-set target of 6.7%.
Whenever it falls more than one percentage point
above or below that target, the BoE must explain how
they will address the difference.
As of October 2023, the current BoE base rate is 5.25%,
which pushes up interest rates with lenders.

01 – Annuity rates have
risen recently

If you’ve saved into a defined contribution (DC) pension
scheme, you have a few different options for drawing an
income. One is to buy an annuity that will guarantee you
a certain level of income, usually for the rest of your life.
With yields on government bonds increasing, annuity rates
have risen through 2023 and are currently enjoying
a 15-year high.
This means you can get a much higher income for the
same level of initial investment than you might have
before this year. If you are approaching retirement or
already in retirement and looking for ways to generate an
income from your accumulated savings, annuities could be
worth considering

02 – Maximising other
savings accounts

If you’re about to retire, consider whether you have
other savings that could provide an income before
you start drawing from your pension. This would allow
your pension to remain invested for longer, potentially
generating bigger returns that, in turn, could provide
a better income in the later years of retirement. This could
also help to reduce the Inheritance Tax bill after you die,
since pensions usually fall outside of your estate.

03 – Using cashflow modelling for
greater understanding

We can help you forecast what your savings will look like
throughout your retirement using cashflow modelling. When
you know whether you’re likely to encounter a shortfall, you
can create a strategy that will help protect you. Ensure you
also consult us on how best to invest your pension savings.
Some pension providers automatically switch your pension
savings into another fund as you approach retirement,
typically one with a lower risk profile. This is called
‘lifestyling’ and isn’t suitable for everybody
as it could harm your pension performance. Speak with
us if you would like to know more about lifestyling and
whether it is suitable for you.

Higher interest rates will affect your pension differently depending on how it is invested:

• If your pension is invested in the stock market, its value
could drop since the stock market tends to go down
when interest rates rise
• If your pension, or some of it, is invested in bonds, its
value could go up, since bonds can increase in value
when interest rates rise
• If you hold savings in cash, you are likely to get increased
returns as high street banks pass on some of the
increases in interest rates

While current headlines are worrying, it’s best to focus instead
on what you can control and on your personal circumstances.

What is your personal inflation rate?

The UK inflation rate is measured by the Office for
National Statistics (ONS), who monitor the fluctuating
price of goods in an average shopping basket. So, how you
experience inflation depends on what you spend your
money on. For example, the ONS assumes that an average
household allocates 9.8% of their monthly budget on a car
or other vehicle. If you don’t own a vehicle, your personal
inflation rate might be lower than average.
Understanding your personal inflation rate, by using an
online calculator, allows you to make informed choices
about how you allocate your monthly income and to
locate possible savings.
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.
The value of investments and any income from them can
fall as well as rise and you may not get back the original
amount invested.
Past performance is not a guide to future performance
and should not be relied upon.
HM Revenue and Customs practice and the law relating
to taxation are complex and subject to individual
circumstances and changes which cannot be foreseen

Get in touch

If you’re worried about the rising cost of living and would like to
discuss ways to protect your finances from the effects of inflation,
we’re here to help. Please get in touch to arrange a time to chat