What does the cost of living crisis mean for your retirement plans?

Amidst the worst squeeze on household income in over 30 years, people nearing retirement are right to be concerned about how the cost of living crisis might affect their existing financial plan.

From geopolitical drama, immense market volatility, a global pandemic, to emerging environmental catastrophe, you’d be forgiven for becoming increasingly desensitised in recent years to proclamations in the media that we are living through yet another ‘crisis’. But even for those who like to escape from the news, there is no crisis quite like one affecting the money in your pocket.

While today you might be comparing notes with friends and family on how much this month’s utility bills have come in at, or the uplift in price for a tub of margarine in your local shop, the ramifications of this particular crisis could stretch much further, like how your retirement looks.

Last week, the Bank of England increased interest rates for the second time in three months – from 0.25% to 0.5% – as it seeks to tackle the fast-growing cost of living. The Bank forecasts inflation to peak at 7.25% in April, nearly four times its target and the fastest price growth since 1991. The timing of the peak could hardly be any worse, given that it also coincides with a 1.25% increase in both National Insurance and dividend tax. And all this in the midst of a freeze on income tax and capital gains tax annual exemption thresholds, scheduled to last until 2026.

The combined effect is likely to result in the biggest fall in take-home pay since records began in 1990, felt even more potently by homeowners on tracker or variable mortgages. Though the chancellor has sought to soften the blow of a 54% leap in utility bills, including through a £150 council tax rebate for 80% of households this April, his support package will only partially offset the spike in energy costs and doesn’t account for inflation elsewhere like in food and fuel prices.

Revisiting cash flow

Those thinking about how much income they’ll need in retirement will typically be told by their financial adviser to work out how much their fixed essential expenditure will be and add on how much they’d ideally like to have to spend on discretionary outlays like holidays, clothes and gifts. As the former, and the latter to a certain degree, is likely to be somewhat higher than the last time you did this calculation, it would be wise to get in touch with your financial adviser, who can tap into more advanced cash flow modelling tools to see a detailed picture of your financial future.

The issue is exacerbated by a widespread mindset shift during the pandemic. Having reevaluated their work-life balance, some workers are seeking to retire earlier than they previously planned or reduce their hours, contributing to the labour shortages which have partly fuelled inflation. Others who were confined to their own homes through the lockdowns, or invigorated to live life more boldly while they still can, are changing their attitude to spending.

Paul Tuson“The effects of the pandemic have resulted in a shift in people wanting to either semi-retire or retire a little bit earlier and have, what I call, a 15-year blast,” says Paul Tuson, Independent Financial Adviser at Ascot Lloyd. “I have experienced a few clients reaching 60 or 65 and wanting to spend money because a friend or relative of theirs died younger than them, for example. Pre-pandemic when I asked if there's any large expenditure planned, there was nothing specific that sprung to mind. Now, they may be more inclined to want to travel the world or treat the kids, or make exciting new memories.

“That’s great, but don’t abandon your retirement planning. It’s a good idea to revisit cash flow modelling every now and then anyway because people are living longer. But if your needs and objectives have changed, and the cost of living is rising at the rate it is, it’s especially important that we sit down and do some figures again. If there are any falls in the market, as have been quite common in recent years, we’ve got to make sure people have got that capacity for loss.”

For those seeking the security of an annuity in retirement, interest rates could in fact be interpreted as a positive. However that is only the case if their current investment allocation isn’t overly allocated to fixed interest securities like Gilts and most corporate bonds, whose performance is negatively impacted by interest rate rises. The effect on an investment strategy combining both would subsequently be relatively balanced, given that a larger income could be provided but the fund itself would be lower. As interest rates are only increasing from a historic low, there is a long way to go before they are anywhere near that of 15 years ago, so annuity incomes still remain unattractive to what they previously were.

Jason Barefoot“A rising cost of living throughout retirement remains the key challenge for retirees to face,” says Jason Barefoot, Chartered Financial Planner at Ascot Lloyd. “My view is that to mitigate this, the advice would not change for longer term investors and where appropriate, consider investing in the great companies of the world, where they could benefit from rising capital values and dividend payments. If taking income, ensure there is ample cash on deposit available to turn off withdrawals during periods of market declines. And draw a sensible income level that enables the retiree to live their desired lifestyle. Collectively, these steps increase the probability that you may lead a comfortable retirement."

Don’t panic

While nothing is certain, the Bank of England is working hard to confine the current cost of living crisis to being a one-off shock. It is hoped that though households might need to dip into their savings to maintain living standards in the coming months, inflation should start to come down following its peak this Spring. With that in mind, it is worth remembering that your financial adviser develops a robust, long-term plan for your retirement, with the emphasis on ‘long term’.

By working with clients to plan ahead, Ascot Lloyd’s Independent Financial Advisers show clients the options they have and map out what they need to help them achieve their goals, even when those goals are changing. When there are times of greater pressure on household living expenses, they will be able to shift your investments to better suit your current and future needs, as well as talking you through the various implications on key aspects like tax and inheritance.

Lynn Healy“Good financial planning is necessary at times like this, so I expect we'll see more people coming to IFAs to help them make the right decisions,” says Lynn Healy, Chartered Financial Planner at Ascot Lloyd. “There can be an awful lot of knee jerk reaction when things like this happen and we've already been overloaded with issues in the last few years. It's quite difficult for people to look at the situation and consider, is it safe for me to retire right now? The trusted knowledge and understanding from a financial adviser is really invaluable in helping you on that journey.”