Cost of living: understanding the impact on your retirement

  • Shunil Roy-Chaudhuri
  • 07 March 2023
  • 15 mins reading time

On 1 March we hosted a webinar, Cost of living: understanding the impact on your retirement. This briefing is based on that webinar.

The cost of living crisis has involved rises in energy and food prices and pushed inflation to a 40-year high. It has left people across the UK feeling anxious about their finances, especially those approaching or in retirement.

We commissioned independent research to find out how people felt about the crisis and its impact on retirement. Our survey of 1,000 UK adults, aged between 50 and 64, showed that 67 per cent of pre-retirees are worried about the impact of the cost of living costs on their retirement. Twenty-one per cent said they felt stressed and anxious about their finances, and 20 per cent of those already retired have returned to part-time work to help maintain their lifestyle.

Hosted by Jo Westwood, director at Schroder’s Personal Wealth, the ‘Cost of living’ webinar featured a panel of experts across several fields.

Azad Zangana, senior European economist and strategist at Schroders

Rory Maguire, managing director of Fundhouse, an independent fund management research firm

Alice Harmer, a personal wealth adviser at Schroders Personal Wealth

Steve Mann, head of investment specialists at Schroders Personal Wealth.

Azad Zangana

Households are having to cope with high inflation, much of it caused by higher energy and food prices. But mortgage costs and rents have also been rising recently, and incomes haven’t kept up with all these rising costs.

I believe we’ve already seen a peak in inflation and I expect the inflation rate to start to slow down by the end of this year. By the end of 2023, incomes should be catching up with the rate of inflation. Even so, this doesn’t mean the cost of living is going down.

Inflation should come down to around 4-5 per cent by the end of 2023, and get down to around 2-3 per cent by the end of 2024. In my view, the Bank of England may be at or close to the peak in raising interest rates.

Many UK companies are experiencing weaker demand, because households have got less disposable income. Even so, the index of the largest 100 UK companies mainly comprises international stocks. Many of the miners and energy companies that feature in the largest 100 UK companies have benefited from high commodity prices. This has helped the UK stock market to perform more strongly than many other markets in recent months.

But bond markets have generally performed negatively in the past year, because rising interest rates often lead to a fall in government bond prices. This, in turn, has led to a higher yield on those bonds, as bond yields rise when bond prices fall. But, if interest rates are peaking, then there could be a rise in bond prices to come.

The US has been one of the better performing markets in recent years. But the US stock market contains technology companies that generally perform well when interest rates are quite low. Now that interest rates are going up, we’re starting to see other parts of the global markets, such as Europe, performing more strongly than the US.

Turning to the Spring budget later this month, the good news for the chancellor is that tax revenues and spending have generally been better than expected. The government may offer some more support for companies, especially those more focused on the energy transition and decarbonisation. But there could also potentially be a bit more help for households, especially regarding energy bills.

Rory Maguire

Markets have struggled in the past 18 months. Markets usually behave negatively in the short run to what they consider to be crises or risky events, but such crises tend to be good buying opportunities too. Some of the main markets fell by around 20 per cent in 2022, including the US stock market. Government bonds, which are considered low risk, fell by a similar amount. So both conservative investors (who typically invest more in bonds) and adventurous investors (who typically invest more in equities) have faced very similar declines. So it’s been a very tough period where almost all investors have struggled equally.

We think the biggest risk is being risk averse after investments have fallen. As mentioned, when prices fall, prospective returns improve because you are buying the same asset at a lower price. This is why we believe in the benefits of staying invested for the long haul and that now could be a relatively good time to invest.

Crises can be painful for investors. If we only go back to 2016, there have been four major disruptive events. We had Brexit, then Covid-19, then the largest war in Europe for 70 years, and now a cost of living crisis. But investments have historically overcome crises and clients that stayed invested have made gains. Even so the value of investments can fall as well as rise and aren’t guaranteed. Investors might not get back their initial investments.

Alice Harmer

I am seeing clients taking advice, following up on that advice, and making really good financial planning decisions. Many clients are topping up their pensions or their ISAs to give themselves a boost later in life.

Another smart option can be to save on a regular basis, to benefit from what is known as pound cost averaging. When you’re investing in the stock market on a monthly basis, then, if the market drops, you’re buying when it’s cheaper. Over time, this can have a smoothing effect on how your money grows.

Some clients who are feeling the pinch in retirement are drawing on dividends, rents or interest on their investments. This doesn’t impact their capital.

There are two big questions people need to think about regarding retirement. First, how much do I need in retirement? Second, when do I need it?

People should try to picture their ideal retirement. This shouldn’t just be about how much it costs to keep a roof over your head and pay the bills, but how much you need to do the things you enjoy.

Regarding the question of when you are going to retire, if you’re going to do that pre-state retirement age, then you’ll essentially get a pay rise once your state pension kicks in. This could mean you need less income later and more now.

There’s a common misconception that you have to buy an annuity with your pension pot, which would typically pay a set income for the rest of your life. But, since the introduction of pensions freedoms in 2015, people have much more flexibility with pensions. This flexibility can be helpful, as you’ll probably spend more, perhaps on travelling, when you’re a bit younger, fitter and healthier. But, as you get older, you’ll probably spend less.

It’s not too late to make financial planning changes, even if you’re already in retirement. In particular, you can think about what allowances you’ve got and whether you’re using them all. There are also tax implications for couples. If one pays more tax than the other, then they can arrange their assets to reduce their collective tax liabilities.

Financial planning can sanity check your financial position. In particular, cash flow modelling could potentially show you that you’re in a better position than you thought. With cash flow modelling we put all your information into a system. We itemise what you’ve got coming in and your outgoings. This produces a visual that tells us what your financial situation will look like on an annual basis. It helps us establish where the best place is to take your income, from a tax point of view. It can also help identify any shortfalls and how you might try to fix them. Sometimes, small increases to regular savings and investments can have a significant impact over time.

In the end, my key message is to seek advice. Don’t bury your head in the sand. Make a plan, because really good planning, regardless of what level of income or what level of assets you’ve got, could make a huge difference. Action taken now could provide lasting reassurance.

Steve Mann

This has been a very nervy period for first-time investors who have been in the markets for 12 to 18 months. They can get affected by what I call the ‘rollercoaster of investor emotions’.

But investments aren’t just for 12 months or 18 months: they’re generally for the medium to longer term. Seasoned investors typically understand that we’ve seen previous downturns in the market and that current market declines could be an investment opportunity.

Many people have been surprised by the performance of the market. We try to have conversations with people, to provide reassurance and ensure they don’t make decisions purely based on their emotions. People shouldn’t let their emotions drive what they’re doing from an investment perspective.

In the short term markets can get driven by emotions, often called ‘market sentiment’. But there are two other areas that are perhaps more significant in driving long-term investment performance: fundamentals, which include factors such as the economy and company profitability, and valuations.

One way to value equities (shares) is by using the price-to-earnings ratio. A price-to-earnings ratio of 10 means, roughly speaking, that a company’s share price is 10 times higher than its current earnings per share. At the start of 2022, the average price-to-earnings ratio for US shares was around 22 times; today it’s around about 17 to 18 times. This suggests there could be good value in US equities.

There are also some signs of good value in the bond markets. For example, high-quality (investment grade) corporate bonds yielded around 2 per cent at the start of 2022. Today they yield around 5-6 per cent.

At SPW, we can take advantage of short-term sentiment through tactical positioning, in other words altering our allocations to different types of assets according to market conditions. Tactical positioning can help smooth out long-term investment returns.

Important information

The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn’t guaranteed and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

The value of investments and pensions and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

Cash savings and investments are protected to the value of £85,000 per person per institution by the Financial Services Compensation Scheme (FSCS). However the value of investments may fall as well as rise.

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.

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