Approaching retirement or in retirement?

How the current economic situation could impact on your finances.

2 min read

The current economic climate and cost of living crisis is having a major impact on many who are approaching retirement or have already retired. Among the groups hardest impacted by the crisis are older people and pensioners, often on a fixed income and spending more on home energy bills than other households.

Many people of pensionable age are reliant on their pensions to fund their retirement, but their pensions may not rise in line with inflation and price increases. Rising costs from rent, mortgages, energy, and food can mean many older people face intense financial pressures.


Age groups

According to the Office for National Statistics (ONS) between March and June 2022 around 24 million people were reducing energy usage within their homes. Those aged between 55 and 74 years were more likely to cut their energy use than most other age groups. Around 6 in 10 of those aged 55 to 64 years (58%) and 65 to 74 years (59%) reported doing so1. With inflation and the cost-of-living increases seen more recently, it’s likely those numbers may will have increased.

Inflation in the year to October stood at 11.1%, up from 10.1% in September, marking a 41-year high2. Rising energy bills are a significant contributing factor: the old energy price cap ended on 30 September 2022, with the replacement Energy Price Guarantee. The Energy Price Guarantee does limit how much you’re charged for each unit of energy, but it doesn’t cap your total bill, and how much you’ll pay will depend on how much energy you use.


Economic climate

For those approaching retirement, the current economic situation presents various challenges. As interest rates rise and inflation increases, it puts further pressure on those on a fixed income.

In addition, some pension savings may need to produce sufficient returns to ensure adequate income levels in later life. All these combined factors may make it more difficult for people to plan effectively for their future financial security. Given these financial pressures, the current economic climate means it is increasingly essential for pre-retirees to plan carefully for their later years.


Negative impact

Those close to retirement should also be thinking carefully about whether they can defer accessing their pension pot. Delaying taking out a lump sum until later in retirement can give retirees more time to benefit from the effect of rising interest rates on their savings.

The current economic situation is also having a considerable negative impact on those already in retirement. The higher prices for goods and services make it more difficult for many to manage their finances. For example, when the cost of utilities increases, those in retirement may struggle to afford them.


Inflationary rises

Similarly, savings used to cover additional costs during retirement can be eroded by inflation if not invested in beating inflationary rises. Some retirees, already receiving a pension or other form of income, are also facing difficulties managing their finances as prices rise faster than income levels.

Rising interest rates reduce the buying power of pensions and other forms of retirement income significantly if they do not keep pace with inflation. This leaves many retirees struggling to make ends meet while having to make difficult decisions about how to manage their money.


Financial security

As such, it is essential for people who are retired to manage their finances carefully and where possible mitigate some of these challenges by planning to provide for their financial security.

Five main areas to consider in order to ensure a secure future for retirees:

1. Savings: Focus on creating a diversified portfolio that contains several investment vehicles. This will help protect savings from the effects of inflation and stock market volatility while providing income growth potential.

2. Retirement planning: Plan ahead by working out how much money you think you will need throughout retirement and researching all available options, such as annuities or pensions, to ensure the required income level is achieved.

3. Taxation: Be aware of any tax changes that could have an impact and take any measures in order to minimise this burden.

4. Cost of living: The rising cost of living is a significant concern for those approaching or already enjoying retirement as it directly affects one's standard of living. Retirees should assess their budget regularly and make necessary adjustments in order to afford day-to-day essentials.

5. Government support: Understand what government benefits or schemes are available to you that may offer additional support.


Helping you ensure a secure financial future

The key takeaway for those approaching retirement or already retired is to start planning now for potential economic issues such as rising interest rates and inflation. Investing wisely, maintaining liquid assets, and keeping an eye on spending will all help ensure a secure financial future.


Sources

1 5th August 2022 | What actions are people taking because of the rising cost of living | ONS
2 16th November 2022 | UK inflation accelerates to 41-year high of 11.1% | FT.com


Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment(s) and the income derived from it, can go down as well as up and you may not get back the full amount you invested.


FP2023-013