High inflation could result in retirees needing to raise their budget by almost 20% to maintain their current lifestyle. Therefore, it’s crucial for those who rely on their pension income to determine whether withdrawing more is feasible to cope with the potential increase in the average cost of retirement.

Throughout a significant portion of 2022, the UK faced high inflation that persists above the Bank of England’s 2% target. While this has created financial strain for many households, retirees may face even greater challenges in coping with a prolonged period of elevated inflation.

The lack of income growth or accelerated depletion of assets can lead to heightened financial uncertainty in later life.

A retired couple needs an annual income of £34,000 for a “moderate” lifestyle

The Pensions and Lifetime Savings Association (PLSA) has updated its Retirement Living Standards to reflect recent high inflation. It found that some retirees will need to increase their budget by 19% just to maintain the same standard of living they enjoyed at the start of 2022.

The organisation noted that people that retired with a lower income have seen the biggest percentage increase because a higher proportion of their budget goes towards areas that have risen the most, such as food and energy.

The PLSA research outlines the yearly income required by retirees to achieve a “minimum,” “moderate,” or “comfortable” standard of living.

The “minimum” lifestyle, as defined by the research, encompasses the essential elements required for retirees to lead a satisfying life, including active social and cultural participation. For a couple, this involves an allowance of £96 per week for grocery shopping, a week-long UK vacation, and affordable leisure activities twice per week, as well as the costs associated with property upkeep.

In the space of just a year, the cost of a minimum lifestyle has increased by 19% for a couple.

The budget for a “comfortable” lifestyle includes additional luxuries such as owning two cars and travelling to Europe for three weeks each year. In the past year, the cost of maintaining this lifestyle has risen by 10% for a household of two people.

The table below shows the PLSA’s estimated income needs for each lifestyle and how the period of high inflation has affected budgets.

Keep in mind that these figures are a useful indicator of retirement costs, but your outgoings will depend on your lifestyle. However, it does highlight why reviewing your pension and income is so important.

If you have already retired, it is advisable to consider utilizing your assets to supplement your income, all while ensuring that you have enough savings to last throughout your lifetime.

4 things to consider if you’re reviewing your retirement income

If high inflation means you need to review your retirement income, these four questions could help you understand your options.

1. How much have your outgoings increased?

To start, it’s important to assess how your expenditures have changed over the past year. While official inflation rates may provide some insight, your personal inflation rate could vary significantly depending on your spending habits and priorities. Therefore, reviewing your budget can help you identify any potential deficit in your finances.

2. How much reliable income do you have?

During retirement, you may have access to multiple sources of income that can sustain you throughout your lifetime, such as the State Pension, an annuity, or a defined benefit (DB) pension.

In certain cases, the income received may increase in proportion to inflation, safeguarding your purchasing power. For instance, the State Pension will see an unprecedented increase of 10.1% in April 2023, which may reduce the income gap that you initially anticipated.

3. Could you use other assets to increase your income?

In addition, it is recommended to evaluate your other assets that can generate income during retirement, such as a flexible income from a defined contribution (DC) pension, investments, savings, or property. Analyzing these assets can be beneficial in bridging any potential gap that may arise due to inflation.

4. Could you sustainably increase your income?

It is crucial to keep the average cost of retirement in mind while making decisions and reviewing your overall financial plan. While utilizing other assets may boost your income, it is vital to consider the long-term sustainability of these decisions, especially considering the potential impact of inflation on the average cost of retirement. For instance, increasing your withdrawal rate from your DC pension could lead to a shortfall of funds later in life, further increasing the gap between your retirement income and the average cost of retirement.

Similarly, drawing an income from investments could potentially affect the performance of your portfolio and have long-term implications on your financial plan, affecting your ability to sustain the average cost of retirement. These are critical topics that are typically addressed during annual review meetings. However, if this article has raised any questions, and you would like to discuss them before your next annual review, please do not hesitate to contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

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