Updated: Nov 21
The cost-of-living crisis is impacting everyone across the country. From rising energy prices to everyday supermarket prices hiking, household budgets are under increasing strain.
If you’re over 55, it may be tempting to use your retirement fund to help with increasing bills. Or if you're employed, you may be thinking about stopping making contributions to support with the increase to the cost of living - but this could be risky.
The world of pensions and investments can be complicated, we would therefore always recommend that you seek expert advice from an Independent Financial Adviser before making any decisions that could impact your financial future.
What is causing the cost of living crisis?
Firstly, let us explore what is causing our prices to rise. The Office for National Statistics reported earlier this year that consumer goods prices are growing to a 30-year high, with the Russia-Ukraine conflict, Brexit and COVID all contributing towards rising inflation.
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%. Currently, income levels remain the same, but everyday costs are soaring resulting in reduced buying power across the country.
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.
How does this affect your pension?
Inflation can affect the power of your pension pot(s). For example, 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 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. It is important you stay calm and take guidance from your Financial Adviser.
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Firstly, ensure you stay opted into your workplace pension. By doing so, your retirement contributions will continue putting you in a better position when you retire. You'll also 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 if you stop contributing to your pension, but you will lose thousands in the long run if you stop. You must play the long game and secure your future.
You should also think about combining your pension pots. You can find old workplace pensions you had forgotten about and combine them to save in management fees.
You can find your old workplace pensions using the Government’s free Pension Tracing Service, or with the help of an Independent Financial Adviser. You could also contact your previous employers if that is possible. Having the name of your provider and policy information is needed to consolidate your pension pots.
Lastly, remember to keep your eyes on the prize. Pensions and investments are long-term. Whilst you may be feeling the pinch now, markets can recover to perform well. Don’t allow short-sighted decisions to affect your long-term plan.
Don’t panic, keep saving and in the end you will reap the rewards.
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.