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Retirement: 4 ways to give pension income a 'much needed boost' as inflation hits 10.1%

With inflation predicted to hit 13 percent in the upcoming months, and the base rate much lower than this, any cash in the bank is losing value over time. Many people may even be forced to dip into pension savings to keep up with these rising prices, however there are ways to mitigate the effects of this.

Express.co.uk spoke exclusively with Colin Dyer, financial planning expert at abrdn, on how Britons can protect their retirement income in the current climate.

According to research by abrdn, the rising cost of living is leading to a drop in confidence in how financially ready people feel they are to retire – with more than a quarter (27 percent) of 2022 retirees saying they don’t know how to reduce the impact of inflation on their retirement income.

Mr Dyer has shared his top tips for retirees or those nearing retirement who tend to be more reliant on their savings.

Make money work harder
Currently interest rates are historically low, and although the Bank of England has recently increased rates to 1.75 percent, this is still far behind inflation at 10.1 percent.

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He said: “With inflation reducing the real value of your savings, it could be worth looking at how your money can keep up with or outpace inflation. This isn’t going to happen if you keep all of your money in cash savings.

“Weigh up the types of medium and longer term savings and investment products available to you. Or, if you already have money invested in a pension or elsewhere, you might want to consider reassessing your attitude to investment risk.

“Remember too that if you withdraw too much too quickly from any pensions you have, you could be at risk of falling victim to your savings losing value in real terms amidst rising inflation.

“If you don’t need to be taking your money from the pension, leave it invested for as long as possible and try to only access it when you need to.”

Maximise tax allowances
Mr Dyer explained that every penny counts when managing money in retirement and that is especially true when it comes to tax allowances.

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For those with money invested in a pension, the “good news” is that they can take 25 percent of their pension pot completely tax-free.

He stressed it can be a “very good move” to use this tax free cash over multiple years, rather than in one go.

He gave an example. If someone retires and they have a pension pot of £400,000, they could take 25 percent, or £100,000 in tax free cash. But if they only take a combination of income and tax free cash that they need in the early years, their pot could grow to say £600,000 over time, in which case higher levels of tax free cash are available.

But the rest of the pension income will be taxed with income tax, just like any other income.

He added: “Plus, you could pay capital gains tax on any shares or funds outside your pension or ISAs.

“That’s why planning the order you use your investments is so important, and speaking to a financial advisor could help you to minimise your tax bill to make sure you’re getting more income.”

Consolidate old pensions
Mr Dyer continued: “Transferring and consolidating pensions could provide a much-needed boost to a pension pot and income – which would be particularly welcomed in the current climate.

“To do it, all people need to know is the name of their employer or pension provider to track down a lost pension. If they don’t have those details, they can use the Government’s pension tracing service.”

Consolidation may not be right for everyone so it may make sense to speak to an expert to get information on specific situations just in case they’re giving up valuable benefits or guarantees by combining pensions.”

Consider a flexi-retirement
These days retirement looks different for everyone. New research from abrdn has uncovered a trend of flexi-retirement, with people continuing in their job part-time or undertaking new passion projects or starting their own businesses.

In fact, two thirds of adults retiring in 2022 will continue to work in their retirement, according to abrdn’s Class of 2022 survey.

Mr Dyer said: “Working in retirement could give you the peace of mind with a steady flow of income continuing, and many in our recent research admitted to wanting to continue working for the social benefits too.

“Although it might not be for everyone, it could be worth considering during uncertain economic times. We’d encourage people weighing it up to speak to their employer about the options and opportunities.”

Lastly, he advised that people should seek professional help if they are unsure about certain things as this could provide “peace of mind”.

Mr Dyer added: “A professional adviser can help alleviate worries and concerns and explore all the options consumers might have, to achieve their desired retirement.

“Those close to or recently retired should consider seeking financial advice to help better understand and review their income and spending as well as seeking guidance on how to make their income as tax efficient as possible.”