The impact of rising costs on retirement planning

A recent survey by insight consultancy, Britain Thinks, found that the rising cost of living is now the primary concern for UK households. As a result, there’s an increasingly compelling case for financial wellbeing at work.

Employers risk having a distracted workforce if they can’t help to ease some of their employees’ financial concerns. A new survey by YuLife and YouGov reports that 80% of employees who are stressed about money say it impacts performance in the workplace.

How can employers help limit the impact of rising costs on employees’ financial planning?

Financial wellbeing is an essential part of overall mental health. Employers are well placed to support staff in improving their financial resilience, which in turn can have a positive effect on the workplace. Here are some ways you can help employees make their money go further:

• Review your flexible benefits scheme to support employees through the types of benefits you offer.
• Re-communicate existing benefits to your employees, especially those that help stretch salaries (such as gym discounts and childcare vouchers).
• Discuss education workshops and webinars with your pension or retirement service provider, to help employees invest in their future.
• Consider offering travel loans for those who cannot afford to pay for an annual or monthly ticket up front.
• Encourage employee consultations with free services such as Money Helper.

Pension contributions

It may be tempting to reduce pension contributions to help with short-term costs, but it’s important that employees continue planning for the future too.

Paying into a pension is a tax-efficient way to save for retirement. Over time, the effect of compounding contributions can significantly boost retirement income, especially if employees take advantage of any generous employer contribution structures or start contributing earlier.

As we live longer, people may still be paying rent or mortgages into retirement and these employees should be thinking about how they’ll cover these essential outgoings.

Remember, all investments can fall as well as rise in value so you could make a loss. If you are unsure whether an investment is right for you seek advice.

What are the options at retirement now?

An annuity is a retirement product that allows you to swap some, or all, of your pension savings for a guaranteed income for life. This means it could be a good option for those looking for a secure income to cover daily living costs and essential expenses in retirement.

Having been less commonly used over recent years, annuities are increasingly worth considering with rates on the rise. And we could well see further uplifts in annuity rates in the coming months.

Features such as inflation proofing or continuing income for your partner after your death can be incorporated into an annuity too. It's important to shop around and get several quotes, as providers will offer different rates at different times and an annuity can’t usually be changed once set up. It’s also vital to confirm health and lifestyle details, as these can boost income further.

There are lots of different factors that could impact how much income you could get, so you need to make sure you fully understand your options before making a decision.

Drawdown is another way of taking money from your pension. This option allows you to withdraw up to 25% of the value of your pension as a tax-free lump sum. Any remaining funds can then stay invested, and you can take flexible income payments as and when you need them.

It’s a higher-risk option because the money typically remains invested. So it won’t be for everyone. If investments go up and you don't take too much out, you have the potential for your money to grow. But the risk is you could run out of money if your investments go down, if you take out too much too early or if you live longer than expected.

Another option to consider is taking lump sums (Uncrystallised Funds Pension Lump Sum). It’s a flexible way to take money from your pension, as you can withdraw your entire pension in one go, or a bit at a time.

Typically, 25% of each withdrawal will be tax free and the rest taxed as income. Anything you don’t withdraw stays invested as you choose. But the same risks apply as with drawdown.

How can we help?

The HL Workplace Retirement Service gives your pension scheme members everything they need to make the right decisions and retire with confidence.

Katie Hooper, Head of Workplace Retirement at Hargreaves Lansdown, says a holistic approach to retirement planning is key:

“Employees don’t need to take money from their whole pension at once. A mix-and-match approach is worth considering.

For instance, they could use part of their pension to buy an annuity to cover essential outgoings, keeping the rest invested for flexible withdrawals as and when they need it through drawdown or lump sums.

A phased approach is also an option. Members could go into drawdown when they retire and access their tax-free cash, then secure an annuity income later in life when health might have declined and they may qualify for an enhanced rate. At this stage in life, they may also prefer to secure a guaranteed income rather than take on the risks associated with managing drawdown or taking lump sums.”

Request our guide to HL Workplace Retirement to find out how you can help your pension scheme members to make the right decisions at the right time.

What you do with your pension is an important decision. So we strongly recommend you understand your options and check your chosen option is right for your circumstances. Take advice or guidance if you’re unsure.

The government provides a free and impartial service to help those over 50 understand their retirement options. Pension Wise are available online (www.moneyhelper.org.uk/nudge-public) or by calling 0800 100 166.

Find out more about the HL Retirement Service