Dear Kate,
Should I postpone my retirement because of the cost of living and the depreciation of my pension? I’m 59 and was planning to retire early next year when I’m 60e birthday.
SL, by email
Kate says:
The cost of living crisis affects almost every aspect of our lives, including the big decision when we retire.
Rising inflation – now at a faster rate than many will have experienced in their lifetimes – is putting pressure on household finances. These two forces work together to affect people’s ability to save for retirement and can cause them to delay retirement and receiving benefits. Inflation mainly affects people with a fixed income, such as retirees.
To make matters worse, investment market volatility has been felt in many types of investments, not just the stock market.
People are experiencing the double whammy of high inflation reducing their purchasing power and plummeting stock markets, making it challenging to plan ahead.
What to do if you are far from retired?
Pensions are long-term investments, lasting at least five to ten years, and hopefully for those many years after retirement, the recent declines in pension value won’t have too much of an impact. And it is hoped that inflation will fall and return to more “normal” levels relatively soon, and that investment markets will recover over time.
Instead of cutting premiums, if you can afford it, you should continue to make regular retirement contributions or even increase your own premiums. Buying now while the markets are depressed means buying more units due to lower fund prices. Making regular contributions, rather than ad hoc payments, is a good way to smooth out fund prices, especially when the market is volatile. And if you save for a company pension, your employer can match your premiums.
What to do if you are about to retire?
Rising prices alongside volatile investment markets pose more immediate challenges to those approaching retirement and can put their retirement plans at risk. For some, the value of their pensions will have fallen sharply in recent months, impacting their projected retirement income if they rely on private pensions, along with Isas stocks and shares.
Do not panic and avoid making hasty financial decisions in a depressed investment market.
Find out if you have enough money to live on as you expected after retirement, or even make ends meet. If not, a simple option is to postpone retirement, work longer, possibly with shorter hours, and continue to save for retirement and Isas.
Employers generally can’t force you to retire at a certain age, and since you’re saving for a self-funded retirement, or Sipp, it’s up to you when you start taking income as long as you’re past your 55th birthday regardless of whether you continue to work or not.
Postponing your retirement can mean a significant increase in your retirement income. You can benefit from the triple increase in your pension through sustained investment returns; extra pension premium from you and any employer contributions; and fewer years to spread the fund once you retire.
If you really want to retire in the coming months and have savings, such as cash Isas, you may want to consider using them before you build up your retirement.
What to do when you are retired?
Due to high inflation, many fixed income retirees will face enormous financial pressures as their purchasing power declines. Millions of retirees who rely on flat or “flat” annuities that don’t grow with inflation will be particularly hard hit.
Those with a defined benefit plan receive an annual pension in supplements. These usually, but not always, increase with inflation, so offer some protection.
For those who use a withdrawal of credit to provide income in retirement, high inflation may tempt them to take out more of their retirement benefits to meet rising costs. However, this comes with risks use up their pension savings faster, especially with today’s volatile investment market, loss of investment growth potential and running out of money in old age. In these uncertain times, people really need to think carefully about whether to withdraw the money, and if so, avoid withdrawing more than they actually need.
One of the great advantages of drawdown is that you are in control. You don’t need to have a fixed income, you withdraw money when and when you need it.
And for those who depend on the state pension, The 3.1 percent increase in April lags far behind the inflation rates we are currently experiencing. There is a glimmer of hope here, as the government has done confirmed the triple lock will be taken back into service next year after a one-year absence. Here, basic pensions and state pensions will be increased after 2016 by the highest of 2.5 pc, the average income growth (in July) or the rise in the consumer price index (in September). This could mean double digits raising in April from about £1,000 a year each.
The government also makes extra cost of living payments of £650 to low-income earners if they receive certain benefits, including pension credit. This is paid in two lump sums of £326 and £324, the first being due in July. The second payment will be made in the fall and the eligibility criteria have not yet been determined, but it is expected to include receiving retirement credit by a certain date. If you think you qualify for retirement credit but have never applied (as is the case for hundreds of thousands of people), now is the time to enroll.
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