Guest comment: The impact of a cost of living crisis

There is no escaping the stark fact we are facing the worst cost of living crisis we’ve seen in a generation.

Households are facing the biggest fall in disposable income for three decades due to a perfect storm which includes a 1.25 percentage point rise in National Insurance contributions from April, ballooning energy prices, and the Bank of England doubling its base interest rate to 0.5 per cent, with further increases anticipated to both interest rates and energy prices later this year.

How will these pressures affect pensions?

Inflationary pressures had already hit real wages over the past year, with the Bank of England predicting a peak of over 7 per cent inflation in April 2022.

The interest rate hike passed by the Bank’s Monitory Policy Committee in response will now pile pressure on mortgages, further lowering household disposable incomes and therefore potential capital available to allocate in savings, investments and pension funds.

The Bank of England’s rate hike will help reduce inflationary pressures and is expected to help bring inflation back towards the 2 per cent Bank of England target. – though at the cost of increasing the debt burden on consumers.

Given most annuities currently purchased do not include index linking, curbing inflation will have one significant positive effect: it will help reduce the year-on-year depreciation rate of annuity values, preventing gradual destitution for many pensioners. And the increase in interest rates should result in an increase in annuity rates for those who are looking to purchase one, although this is only a rise from near historic lows.

We will need to keep a close eye on the impact the financial pressures will have on auto-enrolment opt out rates, contribution rates and income withdrawal behaviour. Retirees who have housing expenses may be particularly hard hit, with the interest rate rise and the steep rise in rental prices over the last year.

AgeUK found that a staggering three quarters of older people have admitted they are worried about the cost of living .

Communicating proactively

As an industry, we therefore need to find a way to provide consumers with the confidence and knowledge to make informed decisions.

Although interest rates have risen, they remain at near historic lows. For the sizeable group which has managed to accumulate cash savings during the pandemic over and above rainy day finds, we need to find a way to provide them with the confidence and knowledge to move out of cash if they are intending to maintain these savings over the longer-term.

We need to proactively communicate with financial services customers and ensure that people are aware of the support available during what will be a tough time for many. The Money and Pensions Service, for example, can help with debt advice and provide guidance around pension withdrawal. Other organisations such as AgeUK provide information and advice services tailored to particular demographics.

Reducing the enrolment age and abolishing the lower earnings limit

Additionally, proposals put forward from the 2017 Auto Enrolment review to reduce the minimum automatic enrolment age to 18 and remove the lower earnings limit would ensure that younger people start saving earlier. These need to be paced into legislation at the earliest opportunity, so employees and employers have time to prepare for the impact.

There have been recent calls to abolish the earnings trigger, which would bring all employees into auto enrolment.

Whilst this would result in a much broader group acquiring pension savings, we need to understand the impact this would have on living standards and personal debt, even more so in light of where we are today.

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