INFLATION

Have you retired too early?

  • Bella Edmunds
  • 22 September 2022
  • 5 mins

With high-profile business leaders such as the boss of John Lewis suggesting that 1 million retirees should re-join the workforce, should you be revisiting the health of your finances to check you are still comfortable in retirement? 

On closer reading, the recent comments in August from Dame Sharon White, Chair of the John Lewis Partnership, relate to the health of the UK’s labour market,but also quoted the fact that 1 million people left the workforce during the pandemic, with the majority being 50 to 70 years olds deciding to retire early (1).  

Fixed incomes versus rising outgoings 

Regardless of whether you were one of the 1 million early pandemic retirees, the entire post-retirement demographic will have felt the impact of the noticeable increase in the price of everyday goods – particularly the cost of energy and food. This is because, whilst the price of your outgoings have been rising significantly, retirement incomes are largely fixed.  

Inflation – what, why and when?

What - The Office for National Statistics (ONS) calculates price rises - inflation - as the change of prices of a ‘basket’ of everyday goods and services, such as the cost of energy, clothing, transport, food and drink, among many others. The most commonly quoted index of inflation is the Consumer Prices Index (CPI).  

Why - There are two main types of inflation: cost-push and demand-pull. Cost-push inflation is when input costs push up the price of the end product. For example, if the electricity price goes up for the factory that makes a jumper and the price of fuel to deliver that jumper to the shop increases, the price of the jumper will increase, as manufacturers pass on some of these extra input costs to the consumer. Demand-pull inflation can happen when there is a short supply, and there is ‘too much money chasing too few goods’, which could result in high demand for the goods.  

When - The current rate of inflation in the UK is the highest it has been for decades. Since the early 90s, inflation has rarely moved above 4%, spending much of the three decades at around 2%. There has been an upward trend over the past two years -CPI has increased nearly every month since mid-2020, and currently sits at 9.9%. (2)  

Could inflation push you back into the workforce?

In some cases, the erosive impact of current high inflation has been so stark that some retirees are considering going back to work in order to afford the lifestyle they want.

Indeed, in an August 2022 Schroders Personal Wealth (SPW) survey on the impact of inflation, 5% of respondents said they were coming out of retirement to take a part-time job as a result of high inflation. (3)

And with CPI forecast to carry on rising as we move through the latter half of 2022, this could end up adversely affecting many more retirees. (4)

So, what could you do protect your pension payments?

Probably the best advice here is to do something – and if you are not sure what that looks like, then make that something talking to a financial adviser.

With inflation in the UK at multi-decade highs, and forecast to keep rising into next year, any pension income kept as cash in a current account will have its relative value diminished. You may end up using up any surplus pension income and potentially get to the point where your monthly payment isn’t enough to support your lifestyle.

Let’s consider how inflation affects the spending power of cash over time:

If you start with £10,000 cash, uninvested, as the prices of goods go up, your £10,000 stays the same, so you won’t be able to buy as many goods. This is called erosion of purchasing power. The higher inflation is, the more your purchasing power is eroded.

For example, if inflation remains at 2% over the next 15 years, your purchasing power becomes around £7,500. At 5%, your £10,000 is worth less than half, and with 10% inflation, your capital is only worth around a quarter of what you started with.

The last example, 10% inflation for 15 years, is extreme. Although the Bank of England (the Bank) does predict that inflation will reach 13% by year-end, the Bank does not believe it will remain at this level as we move through next year. In fact, they expect inflation to start falling next year and to settle at around 2% in two years’ time. (5)

Lies, damned lies, and statistics…

OK – that’s a bit strong! But whenever forecasts are involved, statistical models will be used to produce assumptions on which the forecast is based.

Any of the many assumptions the Bank will have had to use in order to reach their forecast for future inflation could change. For example, there might be an unexpected external shock to the global economy, such as an escalation of tensions between China, Taiwan and the US. Any change in assumptions means that the Bank may not be able to get inflation down to the 2% it is currently predicting.

Whether or not the Bank of England manages to slow the pace of inflation, it is possible that there could be elevated inflation for several years – and this is bad news for anyone holding cash or receiving fixed income payments such as pensions.

Planning your financial future doesn’t stop when you retire

If you have spent time and effort getting your financial plans in order as you worked towards retirement, you may believe you could sit back and finish financial planning once you finished working.

However, if you stop thinking about your money in retirement and just let your assets sit in your bank account, then you could start to undo all the hard work put into planning your retirement, and potentially be forced to re-join the workforce.

(1)John Lewis boss: Over-50s quitting the workforce fuels inflation - BBC News, 9 August 2022.

(2)What is inflation? | Bank of England, 14 September 2022.

(3)Impact of inflation research, Schroders Personal Wealth (August 2022)

(4) And (5) When will inflation start to come down? | Bank of England, 14 September 2022.

Important information 

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 part) without our prior written consent. 

Fees and charges apply at Schroders Personal Wealth. 

In preparing this article we have used third party sources that we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.  

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

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 do down as well as up.  The benefits of your plan could fall below the amount(s) paid in. 

Forecasts are not a reliable factor of future performance. 

There is no guarantee by investing money it will keep level or beat inflation, particularly when inflation is high.

All information correct at the time of publishing.

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