5 practical tips for managing your pension during the cost of living crisis

Category: News & United Kingdom

It’ll be no surprise if the constant stream of pessimistic financial news stories you have seen recently has given you cause for concern.

It’s clear that a mix of rising interest rates and high inflation are having an effect on the household finances of many.

The mood of doom and gloom can often be accentuated by media economic analysts, who can tend to hype bad news rather than take a more balanced and long-term approach.

Consequently, it’s important to keep a sense of perspective when you’re planning your long-term financial future, and that especially applies when you’re thinking about your pension fund.

As an antidote to the bad news – and to help you keep a level head regarding your pension investments – read about five things you should keep in mind when it comes to planning for your retirement.

1. Don’t stop making pension contributions

It’s very possible that your pension contributions are one of your biggest outgoings. This makes it understandable if you’re tempted to pause your payments for a time to reduce your regular monthly expenditure and provide yourself with some financial breathing space.

However, you should resist this as far as possible as this is the money you’re saving to fund your future after you retire.

Missed contributions now can be hard, and costly, to make up in the future because you’ll lose out on accrued compounded growth on those missed contributions. You’ll also potentially lose any matched employer contribution.

If you do stop, you may also find it hard to restart as there may always be some “better” use for the money.

2. Remember saving for your retirement is a long-term commitment

As well as keeping up contributions, it’s also worth reminding yourself that saving for your retirement is a long-term commitment. This is especially true when contrasted with a short period of high inflation or a year-long recession.

It’s likely that the next year or two will be financially challenging, but your retirement could well still be years away, which leaves plenty of time for markets to recover.

It’s important not to overreact to short-term bad news and make changes to your long-term plans that you may regret.

The reality is that, over an extended period of time, investing your money is usually the best way to grow your wealth and enjoy a comfortable financial future.

3. Don’t tamper with your pension investment strategy

Regardless of the temptation, you should try to avoid making changes to your long-term investment strategy.

The nature of markets, and of economies more generally, is that they do go through periods of turbulence. Making changes at every sign of fluctuation ignores the fact that any robust investment plan will have factored in the possibility of such uncertainty, and that your money will be invested accordingly.

It’s tempting for you to overreact to poor economic conditions. In most cases, however, any changes you make could do more harm than good.

4. Consider delaying or phasing your retirement

If your planned retirement date is imminent, you may want to consider delaying the date you stop work, assuming that’s practical.

Drawing income from your pension fund when values are low means you’re having to cash in more shares, or units, to achieve the level of income you may need. By deferring this, you can help protect the longer-term value of your fund.

Another possibility is to consider a phased, or partial retirement.

By reducing your hours and salary as you start drawing an income from your fund, you can put less strain on your investments as the amount you’ll need to take will be lower. It’ll also give you the opportunity to add more to your retirement fund while you’re still working.

Bear in mind, however, that if you do start taking income from your pension fund, as opposed to just tax-free cash, the amount you can subsequently contribute to your fund will usually reduce to just £4,000 each year.

5. You may need to adjust your income plans

If you are already taking income from your pension, or from other savings and investments you may hold, you might need to review how much you’re taking, and where you’re taking it from.

We would strongly recommend that you get expert advice in this regard. The tax implications mean that missteps could result in you paying more to HMRC than you need to.

It’s therefore important that you consider all factors before adjusting your income and take a considered and informed approach to managing your income.

A recession doesn’t necessarily mean markets will decline

The Bank of England are expecting inflation to start falling in the middle of 2023. There’s also further cause for optimism in a recent report from  Vanguard Asset Management, who are one of the leading investment fund managers in the world.

Their report suggests that there’s no direct correlation between stock market performance and the timing of recessions. So even if the UK economy does suffer a prolonged recession, there’s no reason to believe that this will automatically have an overly detrimental effect on the performance of your fund.

It’s often the case that financial markets tend to “price-in” anticipated events before they actually occur, which provides a reassuring message in terms of how your fund could fare in the coming couple of years.

Get in touch

If you need some advice or guidance regarding your pension arrangements, please get in touch with us.

Please note

The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC legislation, which is subject to change.