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Cost-of-Living Crisis: Is it Time to Rethink Your Pension Savings?

The cost-of-living crisis is hitting people hard up and down the land. From rising energy prices to everyday supermarket prices hiking in price due to inflation, household budgets are being pushed to the edge.

The Office for National Statistics is reporting that consumer goods prices are growing to a 30-year high, with the Russia-Ukraine conflict, Brexit and COVID all contributing towards rising inflation.

Even with the Government’s £150 council tax rebate, some people are having to make a choice between food and heating. For those with pension pots and savings, you may feel as though you need to use that money to pay to live. We know you may feel concerned, but in this article Reeves Independent show you what you can do to try and combat this issue.

Why is this happening?

Income levels remain the same, but everyday costs are soaring. Inflation is the level at which the cost of goods increases per annum. For example, if a loaf of bread rises from £1, to 1.05, then bread inflation is 5%. Imagine you have £10,000 sitting in a briefcase in your bedroom for the next ten years. If inflation – as the Government are pushing for this year – was at 2% for that decade, then the cost-of-living would be 20% higher today. Therefore, your £10,000 wouldn’t be able to buy you as much as it would have done years previously – meaning the value of your money has been decimated.

The Bank of England uses an imaginary basket called the Consumer Price Index (CPI) to track products and their prices over time. If they observe the price of an item growing too quickly – an indication of inflation – they could increase interest rates. They may also lower them if prices are decreasing/not growing fast enough, which can cause an indirect knock-on regarding wages.

As things stand, we are heading for a recession as March saw inflation hit their highest levels since 1992.

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How does this affect your pension?

Inflation can affect the power of your pot(s). if you had £100k in your pot and you were planning to retire in ten years, with inflation at 2% over that period. If your pension grew at 2% you would have £122,000 but as the price of everything rose by 2%, then you’d be no better off as your £100,000 could have bought you the exact same ten years prior. If it rose 4%, it would be worth £148,000 which means you would be better off.

The cost-of-living crisis also impacts the economy and, indeed, your investments. For example, if Sky saw a reduction in their customers to due to people not being able to afford their TV and broadband services, their share price would fall. Let’s say you had invested £100 last year and their price fell by 20%, you would now only have £80 of your initial investment left.

Diversification should be able to mitigate this, but at the moment we are still experiencing slower growth and, indeed, some losses. ‘Stagflation’ – high inflation and stagnant economy – is where find ourselves right now and it is important you stay calm and steer through these choppy waters.

Firstly, ensure you stay opted into your workplace pension. You will, in return, keep contributing towards your retirement, receive a 25% tax top-up on your contributions from the government and your employer will contribute at least 3%.

You will also benefit from compound interest, which can turn an insignificant pot into a large one.

You may think you can save some money now, but you will lose thousands in the long run if you stop making contributions. Play the long game and secure your future.

You should also think about combining pots. Firstly, you can find old workplace pensions you had forgotten about – meaning you now have extra dosh – and by combining them you can save less in management fees as your pot will be in one single place, which is cheaper and easier to manage.

You can find out where your old workplace pensions are using the Government’s free Pension Tracing Service, or with the help of an IFA, as well as contacting your previous employer. Having the name of your provider and policy info is vital to consolidating pensions.

Lastly, remember to keep your eyes on the prize. Pensions and investments are long-term. Whilst you may be losing out now, they can recover to perform well. Don’t allow short-sighted and emotional decisions to affect your planning. Don’t panic, keep saving and in the end you will reap the rewards.

At Reeves Independent, we understand times are tough right now. But we will be your side during your retirement journey and will help you to achieve your retirement goals.

The articles are for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action.

No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.

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