Cost of living crisis affect on retirement planning

25 July 2022

The cost of living crisis is changing how people prepare and save for retirement, according to a new paper from AKG.

The paper, Freedoms Revisited: Where do we go from here?, published in partnership with abrdn and Scottish Widows, found advisers positive on the pensions freedoms but high inflation and cost of living concerns are throwing up challenges for both consumers and advisers

For consumers, their biggest worry is running out of money (42%), the impact of inflation and cost of living (40%) and care costs in older age (31%). Advisers’ biggest concerns for their clients is investment volatility (67%) and the impact of rising long-term inflation (59%).

Matt Ward, communications director at AKG, said: “Concerns around inflation and cost of living crisis are a very real threat and issue for people across the country and will have a direct impact on the considerations of pension customers across age groups and whether in accumulation or decumulation pension phases.

“We have had such a prolonged period of low inflation that a lack of inflation may be almost baked into people’s assumptions and their positions / plans could be heavily destabilised. The industry therefore needs to be both helpful, practical and realistic in the way in which it seeks to educate and address these issues with a wide range of pension customers.”

Ward added: “Clients will need to be warned about potential impacts. Whilst economic backdrop and markets had been relatively benign since the pension freedoms changes came into force, income drawdown investment portfolios are now facing a series of challenges and will need to withstand a period of turbulence. Pension assets, and others where support required, will have to sweat for longer.”

For its paper, AKG conducted three separate market research exercises with both consumers and advisers, including a qualitative study with senior executives at advice / planning and employee benefit firms.

Alistair Black, head of industry change at abrdn, said: “Whether the cost of living crisis is short or long lived, it is a reminder about the importance of financial planning. For clients pre-retirement the current economic conditions may have a long-term impact on their plans if they cannot afford to save as much.”

Jacques Bezuidenhout, head of retirement solutions at Scottish Widows, added: “It is positive to see consumers saving more for retirement and becoming more engaged with their pension. However, concerns remain around the number of customers not seeking advice particularly as defined contribution pension pots become more prevalent.”

The full paper is accessible here. 

Professional Paraplanner