How to protect your pension pot in challenging times

The cost of living crisis means that millions of UK households will be feeling the pinch this winter.

With inflation set to peak at more than 13% and fuel bills soaring, carefully managing your current budget is crucial. So too is maintaining your long-term financial security. That means keeping a firm grip on your pension savings.

Whether your retirement is a long way off or fast approaching, there are simple steps you can take now to safeguard your future.

Keep reading to find out more about how you can protect your pension pot during challenging times.

1. Revisit your household budget

The scale of the current crisis means that even those with a high level of financial resilience could be affected.

Taking the time to revisit your household spending now could highlight some simple ways to cut costs and avoid larger issues further down the line.

Carefully track your income and expenditure over a month. You might uncover forgotten gym memberships or unused subscription services. Maybe you are paying over the odds for car insurance, have energy contracts that are due for renewal or are simply spending too much on luxuries like meals out.

Cutting back or shopping around could make a huge difference.

2. Be sure to maintain your current pension contributions

A simple cashflow modelling exercise could highlight the need to curb your spending. If so, making cuts in the right areas is crucial.

Monthly pension contributions, especially if they are toward a retirement still a decade or more away, might seem like an unnecessary expense in the current climate. The effect of lowering or stopping contributions, though, can be far-reaching.

Lost tax relief, the potential for lower investment returns and the diminished power of compounding could all significantly decrease the size of your pension pot at retirement.

As we saw last month, the long-term cost of pausing pension contributions could run into the thousands, so think carefully before making a decision.

3. Increase your workplace pension contributions if you can

When you pay into a workplace pension, not only do you receive tax relief on the amount you contribute, but you also benefit from an employer contribution.

Current auto-enrolment rules for 2022/23 mean that the minimum contribution you can make is 5%. Your employer will then add 3%, making a total of 8%.

This is only a minimum, however. If you can afford to, consider increasing your contribution.

While the current economic climate might make finding extra cash difficult, paying your future self now will give you the best chance of achieving your long-term retirement goals.

You might even find that your employer is willing to match your contribution increase.

4. Think carefully about your retirement options

The Bank of England (BoE) forecasts that inflation will peak at more than 13% this year, not returning to its own 2% target until 2024.

If your retirement date is imminent, you will need to think about the impact of high inflation on the pension option you choose.

An inflation-proofed annuity

You might opt to use your pension pot to “buy” a guaranteed income for life. With annuity rates high, now could be a great time to do so.

In fact, the Telegraph recently reported that an annuity bought using a £100,000 pension pot in July 2022 would provide £27,300 more throughout retirement than it would have just six months before. Rates are expected to rise even further in 2023.

You can choose to purchase an annuity that rises each year by a set percentage to help combat inflation. You will need to be aware though, that the cost of this rise will mean your income in the early years of retirement is lower.

An annuity can also be set up in such a way that it continues paying to your partner when you die. Typically, you can choose for the full amount, or 50% of it, to remain in payment and it will do so for the rest of your partner’s life.

Annuities have their downsides though. Without a spouse’s pension (or a guaranteed payment period) in place, your pension payments cease on your death. Once in payment, annuities are also very inflexible and can rarely be changed. You will need to be very sure it is the right option for you before agreeing to a lifetime annuity.

Flexi-access drawdown

Pension drawdown, meanwhile, allows you to flexibly access your pension funds as and when you need them.

Leaving the rest of your pension pot invested means there is still the potential for investment growth. Investment values can rise as well as fall, though, so you will need to weigh up the risks.

You will need to budget very carefully, especially during market downturns when you will have to sell more units to raise the same level of income. This can deplete your fund more quickly than you realise.

Unlike an annuity, which will pay an agreed amount for the rest of your life, there is no guarantee with drawdown. If you take too much, there is a real chance your pot will run out and your pension withdrawals will cease. Careful budgeting is vital.

Managing your withdrawals carefully – drawing down only what you need – has another advantage, too. It means that you are unlikely to end up with unused funds sitting in your cash account. This is particularly important in a climate of high inflation and low savings rates when you could find that your cash savings are effectively losing value in real terms.

5. Speak to the experts

At Bowmore Financial Planning, we have years of experience in financial markets and can help you manage your money in a way that is right for you.

We will review your long-term plans regularly to ensure your investments are still on track. We can also help you to decide on the right pension option for you, in the current climate, or in the future.

If you are concerned about the effect the cost of living crisis could have on your plans, get in touch, and see how we can help you.

Get in touch

We can take a holistic look at the whole of your finances and help find the right solutions for you. Email or call 01275 462 469 to find out more.

Please note

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement

Workplace pensions are regulated by The Pension Regulator.

Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.

The Financial Conduct Authority does not regulate cash flow planning.

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