Pensions are such a popular tool to save for retirement however they are not immune from the effects of inflation. Despite pensions usually growing at a faster rate, inflation still has the power to erode the value of a pension pot over time.
She explained that with inflation reaching a 40-year high, at nine percent, savers will likely be feeling the pinch and their income may not stretch as far due to the cost of living crisis, meaning their ability to make significant contributions towards their retirement savings may be under threat.
She said: “Beyond typically growing faster than inflation, pensions also help offset the impact of inflation due to benefitting from compounding returns.
“This ultimately means any contributions made now could have a huge impact on a savers’ eventual retirement fund over time.
“They are also a tax-efficient way of saving, as most savers will be able to take advantage of tax incentives from the government. For every £100 a saver pays into their pension, the government usually adds another £25 in the form of a tax top up. Some savers may also be able to claim more tax relief through Self-Assessment if they’re a higher or additional rate taxpayer.”
Romi suggested a few things that savers can do to protect their retirement savings during the cost of living crisis.
Tip 1) Consolidate old workplace pensions:
She explained that by combining any existing pensions into one personal pension pot, savers can avoid losing track of any hard-earned savings.
This way their personal pension becomes their “home” pot that they’ll keep until retirement, meaning they’ll only ever have to manage this and a current workplace pension.
Tip 2) Set short-term savings goals:
There may be times when a saver may be able to contribute more or less to their pension.
Taking the time to put in place an achievable short-term saving plan can help keep savers on track with their savings journey even in times of greater financial stress.
Tip 3) Leave their pension invested:
Lastly she suggested that Britons leave their pension invested for just a few years longer as this can dramatically increase a retirement income.
While everyone can legally access their personal and workplace pensions from the age of 55 (57 from 2028), it doesn’t mean they always should, particularly if they have other means of income available.
In April 2022, Ofgem increased the energy price cap by 54 percent, something that could add £693 a year to the average household bill.
It’s unwelcome news as many contend with the increasing cost of living.
According to The Guardian, some households could see their inflation rate reach 10 percent by the end of 2022.
One group that may see this happen are pensioners or those about to retire, as they tend to use more energy to heat their home during the day.
As the cost of living rises, so pensioners may be forced to take more money from their pension to maintain their lifestyle.
Keeping up with the cost of living coupled with market uncertainty has driven investors to withdraw more from their pension pots.
Due to an increased need for cash to cover living costs and market uncertainty, the average value of income withdrawals from pensions increased in January and February this year, according to interactive investor, an online trading platform, which collected this data from its Self Invested Personal Pension (SIPP) product.
Becky O’Connor, Head of Pensions and Savings at interactive investor said: “Not only do older people face a disproportionate impact on their living standards because of the greater than average proportion they spend on essentials such as energy and food, they are also more exposed to the slings and arrows of global stock market fortunes.”
Its research indicated that the average value of withdrawals from a SIPP drawdown in January was eight percent higher than the average recorded over the past four years. January recorded an average withdrawal amount of £1,944, which was up 25 percent when compared to the average withdrawal amount in the same month across the past four years.
“What we are likely to see over the coming months is retired people paying more attention than ever to that fine balance between withdrawing what they need to cover living costs and keeping enough in the pot to sustain them for their whole retirement,” said Ms O’Connor.