Dealing with the cost of living crisis in retirement

As the cost of living roars on, there are growing signs that more positive news might soon be on the horizon, but in the meantime people in retirement continue to feel the strain on their pockets.

Whisper it quietly but there are tentative hints of cautious optimism in the UK economy, though tentative is very much the optimum word. Bank of England governor Andrew Bailey said in January that "the corner has been turned" on inflation and it will fall "quite rapidly this year, probably starting in the late spring". Leading the charge is a fall in wholesale gas and electricity bills, which energy regulator Ofgem says could start lowering household energy bills from April.

Meanwhile, an unexpected ONS estimate of 0.1% GDP growth in November cooled fears that the UK was already in recession at the end of last year. Though still expected to fall into recession in the first half of 2023, the economy is then on course to grow again. This at a time other economic shackles, such as supply chain pressures which have endured since early in the pandemic, also continue to ease, accelerated by the abandonment of China’s Zero Covid policy.

It would be highly premature to express too much optimism. Food price inflation remains stubbornly high, meaning households will continue to feel the strain on their day-to-day expenses for some time. The jobs market also remains tight and real incomes have failed to keep pace with inflation. However, having adapted to the initial shock of double-digit inflation last year, people will be forgiven for indulging in a more positive outlook as spring gets nearer.

“There is certainly a more mixed outlook now, compared to last year when a negative outlook was pretty widespread,” says David Browne, Independent Financial Adviser at Ascot Lloyd. “However, we are still in the midst of a cost-of-living crisis and a big part of our role as advisers is getting people through that in the least disruptive way possible to their lifestyles in retirement.

“A lot of people with portfolios that enabled them to increase their income have done so, so it hasn't affected their lifestyle that much. But those who haven't had excess capital to rely on have had to make cutbacks. Travel is one aspect. Others are general day-to-day cutbacks such as shopping in a cheaper supermarket or buying cheaper brands.” There have been reports of 500% spikes in the sale of energy efficient products such as air fryers and electric blankets.

The great unretirement?

Other retirees have had to go further still, reconsidering their retirement plans altogether. This marks a stark contrast to a trend of retiring earlier which gathered pace during the pandemic. A House of Lords report concluded that an increase in early retirement was the biggest contributor to an exodus of 565,000 people from the UK labour market since the start of the Covid crisis.

The cost of living crisis is changing the tide once again, with a recent study by Royal London finding that one in three people who were planning to retire in the next five years are now reconsidering. Another recent study from My Money Expert, meanwhile, found that rising inflation has upended the plans of 12% of retirees and 6% of retirees, approximately 733,000 people across the UK, are likely to return to the workforce in order to top up their pension pots.

“Volatility in the equity and bond markets caused people's pensions and investments to fall in value last year,” says Browne. “That combined with the increased cost of living means their retirement savings will no longer go as far as they would have done when inflation and markets were at a more normal level. That has naturally prompted some people to reconsider in terms of affordability whether they can afford to retire. I think we're definitely going to see less people retiring unexpectedly, certainly compared to what we were seeing during the Covid pandemic.

“There have undoubtedly been people who have wanted to draw additional income from their retirement pot but to do so would threaten the long-term sustainability of their desired lifestyle in retirement. But if people feel like they can get through the next few months, they might then find that their portfolios are beginning to grow again at a time when inflation is rapidly falling. This is where a financial adviser is so valuable, regularly assessing your income against expenditure.”

Trust in the long term

The majority of people who receive financial advice have found themselves in a stronger position than those that don’t during the cost-of-living crisis. A lot of this, of course, is due to the knowledge and expertise that financial advisers can offer, applied to the individual needs and objectives of each client. The enduring emphasis on constructing a robust, long-term retirement strategy means the plan is built to withstand short-term volatility in the economy.

But of almost equal value is the calm, trusted reassurance provided by financial advisers to their clients, especially during times when sensational media coverage can scare and panic people into making bad financial decisions. Reassurance is underpinned by trust in the long-term plan.

“It's important to ensure people have a balanced view rather than being bogged down by only negative stories in the media,” Browne adds. “It's very easy when markets are going well to sit down with clients and say you've made this amount this year. When markets are going through a difficult time, reassurance is just as important as advice, putting people’s minds at ease that although their portfolio is down, with some small tweaks they are still in a good position overall.

“Any reviews we do with clients now we'll be discussing the outlook for the next year, and there are opportunities on the horizon. Our job is to prompt a longer-term view, directly linked to their aims and objectives. It definitely should be more positive moving forward. People might not be quite ready to have a general positive outlook, but I don’t think we’re too far off from that either.”

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