Rising costs are damaging pension pots for existing retirees, as well as those looking to build a decent pension in the future.
It’s no secret that we are in the midst of a cost of living crisis.
Inflation remains stubbornly high, reflecting the fact that so many of our typical outgoings continue to grow in price.
And while salaries have also increased substantially overall, the truth is that many of us have not secured pay increases and so are forced to find ways to make our money stretch further.
However, it’s worth reflecting on the damage this situation is doing not only to the current generation of retirees but future ones too.
Dipping into pension savings
Pension savers are taking advantage of the pension freedoms by making withdrawals from their pot, but the rate at which it’s happening is sparking some concerns.
Figures from HM Revenue & Customs (HMRC) show that a total of £4 billion was withdrawn from flexible pensions by around 567,000 savers. That comes after the £3.4 billion pulled out in the previous quarter by around 519,000 people.
The amount being taken out on average is also up noticeably, by 17% to £7,100.
Understandably, this has raised some eyebrows. While pension experts have warned against hitting the panic button, it’s certainly significant that so many people are taking out so much cash from their pension pots.
After all, the big downside to the pension freedoms has always been that the added flexibility comes with the very real risk of running out of money down the line.
And this risk only grows in size when our household costs are growing so quickly, and pensioners have little option to increase their income beyond withdrawing from their pension pot.
Storing up problems for later
It’s not just today’s retirees who are feeling the effects of the cost of living crisis though, but also tomorrow’s pensioners.
The fact is that the higher costs we are all having to pay on absolutely everything is making it tougher to actually build a pension in the first place.
Our outgoings have grown to such a degree that many people simply don’t have the money to set aside each month to build a pension which will provide for them in their later years.
For example, more than one in five of us have reduced if not completely stopped making pension contributions, according to a study from Hargreaves Lansdown.
It’s echoed by a separate study from Interactive Investor, which found that a whopping 58% of adults aged under 66 have had to stop saving into a pension, or reduce their savings, while a quarter would like to save more but cannot afford the extra contributions.
This comes after the pandemic, when an awful lot of people paused their pension saving too, and have not quite caught up to previous levels still.
Essentially the cost of living crisis is forcing people to make tough decisions over how they use their money, all too often having to prioritise short-term needs over what’s best in the long term.
That means that when this generation finally does hit retirement ‒ and goodness only knows when that will be given increases to state pension age ‒ they are more likely to only have modest sums set aside to supplement whatever they might receive from the state, resulting in a more difficult retirement.
Eating into tomorrow’s pension income
Another good example comes in the growth of longer mortgage terms. Increasing numbers of borrowers are opting for lengthy mortgage terms, 35 years or even longer, simply to ensure that the monthly repayments are actually affordable.
Those longer terms mean that the monthly bills are a bit smaller, which can be crucial for passing affordability tests from mortgage lenders, but they will cost more over the long term.
After all, you are being charged interest on your debt for longer, meaning the cost of paying the mortgage is higher overall.
There’s a practical issue here too ‒ signing up for such long mortgage terms means far more people will be repaying their mortgage into retirement, having to devote some of their retirement income towards clearing that outstanding debt.
The Bank of England has even sounded the alarm over the situation, noting that the share of lending on terms of at least 35 years has grown from just 4% at the start of 2021 to 12% today.
All of which paints a pretty bleak picture.
Today’s older people are having to dig into their pension savings at a greater rate, just to keep up with rising costs, while tomorrow’s pensioners are unable to save sufficient amounts because of their own mounting bills.
Getting inflation truly under control is more essential than ever.