40-year high for price rises could put retirement on hold

Retirees with private pension pots will find it harder to make their money last and could run out of money sooner, warns interactive investor's head of pensions and savings.

• Biggest monthly rise since April driven by energy price rises, petrol and food, which typically make up a higher proportion of outgoings for pensioners 
• Retirees with private pension pots will find it harder to make their money last and could run out of money years earlier if they take more out now 
• Older people are already choosing to work for longer or go back to work to cope with rising cost of living, labour market figures suggest  
• Pensions and retirement: guides, information and ideas to help you plan for retirement

Annual inflation hit 10.1% in July, up from 9.4% in the year to June, according to the Office for National Statistics (ONS) figures this morning. Indicative analysis by the ONS suggests this could be the highest CPI inflation rate since 1982.

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “The latest inflation numbers will heap more despair on people trying to plan a decent retirement. They will also dismay those who recently retired thinking they would be OK, but now can’t make the numbers add up. Those who chose to retire early during the pandemic may now be regretting that decision. 

“It looks like ‘back to work’ will be the order of the day for older people who would like to enjoy retirement but can’t because of rises in the cost of living. 

“We’ve already seen from ONS labour market figures earlier in the week that more people aged 65 or over are continuing to work or returning to work since the pandemic. Higher inflation could drive this trend and put retirement on pause for hundreds of thousands of would-be retirees, or bring more of those who had perhaps prematurely thought they were in a good position to leave work back out of retirement.  

“In order to retire, people will need bigger pension pots than before to cope with rising prices, but at the same time, they are likely to feel even more cautious about using their retirement savings, for fear of running out of money too soon. They are caught between a rock and a hard place. 

“A rise in the amount withdrawn from a pension from £5,000 a year to £5,500 a year to cover a 10% rise in prices could mean a pension running out two years earlier, at age 83 rather than age 85. 

“The pressure of making pension savings last is great at the best of times. During the worst of times, it becomes too much. Working again starts to look like the best option. 

“That’s for those who can still work. There is a good reason that retirement is a thing and that is as people get older, they may find work tougher or have more caring responsibilities that preclude work. Work will not be an option for many older people. Those who can’t boost their incomes will find it harder and harder to cope this winter without more help.  

“Energy bills could end up taking up more than half of pensioners’ state pension income by the end of the year. That’s completely unmanageable if people are going to be able to continue to feed themselves.

The average weekly state pension payment was £159.81 in February this year, or £8,310 a year. A rise in energy bills to £3,582 in October would mean that energy costs would make up 43% of pensioners’ average income this autumn. This would leave those relying on the state pension with just £90 a week to spend on food, petrol and other basic living costs, such as clothing, home and car maintenance. 

The average private pension savings of someone aged 55 or over and able to access their pension is £132,464, according to interactive investor research. This would give an approximate annual income of £5,000 until age 86 through drawdown, which, on top of the average state pension currently received, would give an annual income of £13,310. This affords a ‘minimum’ standard of living in retirement, according to the PLSA.