Rising inflation could tempt savers to delay retirement

Rising inflation could have a significant impact on the timing of retirement decisions, analysis from XPS Pensions Group has suggested, after it found that members who delay their retirement could see a "material increase" in their pension.

The consumer price index today (20 July) reached 9.4 per cent, although XPS noted that whilst inflation is still predicted to rise in the short-term, longer term expectations of inflation have started to fall.

This fall in long-term inflation expectations has also impacted defined benefit (DB) funding levels, as the group’s DB UK Funding Watch showed that UK DB long-term liabilities over the past three months have “surprisingly” fallen by around £140bn.

However, XPS clarified that the majority of increases to members’ benefits will be based on inflation rates published later in 2022, and retirement options may not reflect this expected higher level of inflation.

As a result, members who choose to retire in early 2023 could see a material increase in their pension compared to retiring at the end of 2022 due to their benefit receiving an additional inflationary increase in 2023, which could result in a 7 per cent difference, equal to over £10,000 worth of extra pension income over a lifetime for the average pensioner.

In light of this, the group argued that delaying retirement could therefore be in some members’ favour, with XPS Pensions Group senior consultant, Charlotte Jones, arguing that "optimising retirement income is more important than ever".

"How a pension is calculated can be difficult to understand at the best of times and most members are unlikely to be aware that their pension could be very different if they chose to retire in 2023 compared to 2022," she continued.

“With inflation expected to fall in the long-term, this is only likely to be an issue that members will need support with over the next year or so.

"There are various ways that schemes can ensure their members have all of the information they need to navigate through their retirement decisions either via adjustments to retirement quotes or communicating with members.”

Quilter pensions expert, Ian Browne, also suggested that members may want to consider delaying their retirement if they have other sources of income, pointing out that a delay could allow savers to build up more in their pension pot.

He explained: "Salaries tend to rise in line with inflation, so this will give you an opportunity to continue to contribute to your pension, take advantage of the tax relief available and invest it to give you above inflation returns depending on your time horizon.

"Furthermore, as you reach the later stages of working life, spending on things such as mortgages begin to decline, so make use of any additional savings by stashing it away in a pension.

"It is effectively the best savings account on the market for the over 50s and should be the last savings you should withdraw from.”

In addition to this, Browne emphasised the need for savers to get their investments right and not to sit on cash, explaining that those with a long-term time horizon should consider if their attitude to risk is high enough.

More broadly, he also emphasised the need for savers to take professional financial advice, stating: "Inflation is a difficult beast to tame and may take multiple approaches to ensure you don’t run out of money in retirement.

"Getting professional financial advice is the best way to ensure you have a plan in retirement and that inflation is taken into account. Without it you risk running the gauntlet and trying to manage the risk on your own.”

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