AJ Bell: How surging cost-of-living affects savers and retirees

by | Apr 13, 2022

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  • UK inflation continues to rocket in 2022, hitting 7% in March and putting pressure on millions of household budgets
  • Savers feeling the pain during the cost-of-living crisis will inevitably be tempted to reduce or cancel pension contributions – but this could cause severe damage to retirement plans
    • A 30-year-old earning £30,000 a year could end up with £37,000 less at state pension age (68) if they delay pension saving for 3 years, analysis shows
  • For those approaching retirement, the impact of inflation will depend in part on how you plan to access your pension
    • Annuity savers will likely derisk as they approach retirement – potentially leaving their fund exposed to rising prices
    • People planning to take a steady income via drawdown should be able to keep at least a degree of risk on the table
  • Challenges for people receiving an income in retirement will vary:
    • Drawdown savers have flexibility but need to consider sustainability of withdrawals
    • Most annuitants do not have inflation protection and will therefore face a living standards squeeze
    • People in receipt of defined benefit (DB) pensions will usually have some inflation protection baked into their income
    • The state pension increased by 3.1% this week, in line with the September 2021 inflation rate


Tom Selby, head of retirement policy at AJ Bell, comments:

“Whether you’re saving for the future, approaching retirement or already taking an income from your pension, the impact of the cost-of-living crisis is likely to be felt in various ways.


“The extent of this impact will depend on a range of factors including your income, spending patterns and how long spiralling prices persist.

“A short, sharp bout of inflation would be extremely painful for many, but the real fear is that the cost-of-living will keep rising over a prolonged period.

“People in different stages of their retirement savings journey will also face different challenges in this environment, from maintaining a long-term savings plan when you’re younger to making a pension income stretch further.


“Whatever your circumstances, it’s worth checking your financial position in light of this new reality, cutting back spending where possible and, crucially, setting a clear budget based on your spending and saving priorities.”

1. Saving for retirement

“If you are saving for retirement the biggest challenge posed by the cost-of-living crisis will likely be maintaining your current pension contributions.


“While saving for the future might feel like a luxury you simply cannot afford at the moment, it’s worth taking some time to write down your incomings and outgoings and think about your priorities. You might be surprised at the difference a few tweaks to your lifestyle can make to the money you have left to save at the end of the month.

“When it comes to long-term saving, the earlier you start the easier it is. What’s more, employees saving in a workplace pension not only benefit from upfront tax relief but matched employer contributions through automatic enrolment.

“Quitting your workplace scheme will effectively mean you are taking a voluntary pay cut, so it is clearly not a decision to be taken lightly.”



Take a 30-year-old who has just started a new job and has yet to make a pension contribution. Let’s assume they earn £30,000 a year and their salary increases by 2% each year.

If they saved in their workplace pension scheme, then 8% of their salary would go towards their retirement. For simplicity we’ll base their pension contributions on total earnings.


If, despite the cost-of-living crisis, they decided to stay in the scheme and enjoyed 4% annual investment growth, they could have a fund worth £306,000 by age 68 (their scheduled state pension age).

If, however, they opt out of their workplace pension scheme and are subsequently re-enrolled in 3 years’ time – as required by auto-enrolment legislation – then their fund at 68 could be worth around £269,000.

In other words, putting off saving in a pension for 3 years has resulted in a final retirement pot worth £37,000 less.


Reviewing your investments

“While a short spell of inflation shouldn’t change your investment approach, it might be worth reviewing the risks you are taking and making sure you are comfortable with your strategy.

“As a general rule, younger investors should be able to shoulder more investment risk than older savers, with the aim of benefitting from market returns over the long-term.

“One of the key benefits of this should be at least keeping pace with – and ideally beating – inflation, something which will clearly be a challenge in the current environment.

“It is particularly worthwhile for anyone invested in an automatic enrolment default fund to kick the tyres of their investments.

“Defaults tend to operate a lower risk strategy than might otherwise be ideal for a younger investor, although you need to be aware that by increasing your investment risk you will also increase volatility, particularly over the short-term.”

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