It is impossible not to acknowledge the impact of the cost-of-living crisis on Britons’ finances.
The combination of inflation hitting 6.2% – the highest rate in thirty years – and a whopping 54% increase in UK energy prices is inevitably taking its toll on household finances. Individuals and families alike now feel they have less money to spend on long-term financial goals and instead prioritise keeping up with their day-to-day expenses.
And the pressure is no different for retirees. Indeed, recent research from My Pension Expert revealed that over a third (38%) of Britons aged 55 and over consider inflation a major threat to their retirement plans.
Unfortunately, the economic turmoil does not appear to be slowing down, with some experts predicting that inflation may even reach 8% or higher in Spring 2022.
Clearly, this is an issue retirees cannot afford to ignore – however some may be unsure what their options might be. Fortunately, however, retirees do have retirement income options available to them, which can help them maintain a financially comfortable retirement, whilst they wait for volatility to ease.
A secure annuity?
Annuities are becoming an increasingly appealing option for many retirees. This is a financial product that an individual can purchase with part, or all, of their pension and receive a guaranteed fixed income for the rest of their life (or for a set period of time).
Adding to the appeal of annuities is the fact that annuity rates – one of the elements used to calculate how much an individual will receive as retirement income – have seen modest increases recently thanks to rising interest rates, so retirees might consider taking out a fixed-term annuity.
Whilst the security of a guaranteed income, at least for a fixed period of time, may seem appealing, one must consider the drawbacks. After all, an annuity locks in an individual at a set rate, meaning that they will not benefit from any further increases in interest rates, or other external factors which may positively impact annuity rates. Further, the proportion of their pension used to purchase an annuity will not have the opportunity to grow – once it has been paid to an annuity provider, it is gone. And this may not suit the needs of some retirees.
A flexible alternative
In which case, retirees could consider flexi-access drawdown. This option gives the retiree the freedom to choose exactly how much money they withdraw from their pension pot – they can take out as much or as little as they want to, leaving what they don’t withdraw invested within their pension fund.
Of course, the pot’s value may fluctuate in accordance with market movements. However, it also means that individuals will enjoy benefits that come with market stabilisation, leaving scope for the pension pot to grow in value in the longer term.
With such an option, retirees can manage their income in accordance with their financial situation. If they need a bit more money to better manage their household bills, they can access it without an issue. This freedom can provide individuals with peace of mind that their money is easily accessible whilst (theoretically) growing in value in accordance with their pension scheme’s investments.
Keep calm and seek advice
Of course, individuals should seek independent financial advice before making any firm decisions regarding their retirement strategy.
Our team of advisers at My Pension Expert, for example, will conduct a thorough review of a person’s finances before making tailored recommendations to suit their current financial situation and future retirement goals. As such, people will be able to make an informed decision, safe in the knowledge that it will enable them to maintain a financially secure retirement.
These are indeed testing times for Britons, with many people at- or approaching retirement age concerned about how they will make ends meet once they leave the workforce for good. However, it is important to remain calm, explore different options, and seek independent financial advice. In doing so, many retirees will be able to weather the financial storm whilst still enjoying a comfortable retirement.