It is impossible not to have noticed the rising cost of living over the last year, with inflation reaching a 41-year high in October and remaining stubbornly up there well into 2023.
These heightened inflation rates have put everyone’s finances under pressure. The rise in food costs, energy bills and gas prices have caused increased financial strain across the country and are likely leading savers to seek additional help.
The financial decisions savers make now – both in relation to their pension and otherwise – could have a significant impact on their long-term financial resilience and retirement income.
Financial advisers and pension schemes are well positioned to offer additional support to savers at this time.
If they take £25,000 out at 55, bringing the pot down to £75,000, it could grow to only £123,000 – a potential loss of £32,000
We have recently published some cost-of-living guidance. It is intended for pension schemes but there is lots in there for advisers as well.
It is designed to help those who need to make informed choices about pension contributions, whether and how to access their savings and to signpost to additional sources of support, including mental health organisations, free and impartial information from PensionWise and MoneyHelper, as well as information about accessing pension credit, cost-of-living payments or help with energy costs.
Achieving a strong financial footing in retirement starts early in a saver’s life, even during times of economic hardship such as the current crisis. Financial education is about more than understanding how much money savers will need in retirement – it should also include the financial implications related to accessing or changing pension savings.
Over 55s can withdraw from their workplace pension pot; however, those nearing retirement should know that dipping in too early could have a significant impact on their future retirement income.
For example, a person with £100,000 in their pension at 55 can expect to see it grow to almost £165,000 by the time they reach 65 (if they don’t pay in anything additional), based on annual growth of 5%.
But if they take £25,000 out at 55, bringing the pot down to £75,000, it could grow to only £123,000 – a potential loss of £32,000. This is a short-term gain for a long-term disruption.
The decisions savers make now could have a significant impact on their long-term financial resilience and retirement income
It is also understandable savers may be considering ways to increase their immediate cash flow during the current economy, which may include opting out of their workplace pension or decreasing their contributions.
It should rightly be the choice of the saver; however, it is vitally important they understand how these decisions will impact their future selves.
If a 20-year-old contributing £200 a month to their pension with a 5% annual growth rate were to stop for three years, the value of their pension pot at retirement would fall by £28,000, from £268,000 to £240,000 if they retire at the age of 67.
With schemes and advisers highlighting other ways to cut down on costs, such as flexibilities within the scheme, savers could avoid the potential long-term implications of opting out.
A conversation about advice could start with the support readily available now which could protect savers from poverty at retirement. Giving people support and confidence in their pension saving is an important part of helping everyone achieve a better income in retirement.
Joe Dabrowski is deputy director of policy at Pensions and Lifetime Savings Association
