‘Surviving the here and now makes future-proofing harder’

UK inflation rises to 5.5% amid cost of living crisis.

CPI inflation rose by 5.5% in January, marginally up from the 5.4% recorded in December, according to the ONS.

Commenting on the rise, Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “With every confirmation of the inexorable increase in price rises, it becomes harder for families to see beyond getting through the next week, never mind the next few years.

“Surviving the here and now makes future-proofing harder. Life plans are being put on hold as daily living costs increasingly suck up earnings and benefits. For many, there is little if anything left to play or plan with.”

For retirees dependent on the state pension

“Millions of people rely on the state pension in later life. Pensioners don’t get pay rises – they get upratings that depend on the rate of inflation the previous September. This April, the state pension will rise by 3.1% - the level of inflation as it was in September but now dwarfed by the current rate of inflation.

The average pensioner receives £159.11 from their state pension, according to government statistics. A rise of 3.1% takes this to £164 a week. A rise of 5.5% in line with current inflation would take this to £167.86 a week. The government is likely to come under more pressure to increase payments to pensioners as they find it increasingly difficult to cover the basics such as heating. The government abandoned the state pension triple lock because high earnings rise figures would have taken the April uprating above 8% and has since come under fierce criticism in the face of significant inflation.

“Pensioners need to make sure they are taking advantage of all discounts, offers and additional benefits that are targeted at people on the state pension. Those on very low incomes might wish to check eligibility for Pension Credit. Don’t forget other benefits, such as carer’s allowance, for which you may be eligible.”

For retirees with a pension in drawdown

“Drawdown strategies may have to change to cope with ongoing rising living costs. You might need to withdraw more from your pension to cope with rising costs, which might also mean paying more tax.

“The idea of taking more out of your portfolio value at a time when your investments might have taken a knock is troubling. Avoid taking out more than you need. Consider whether your income drawdown rate is still sustainable if you increase it slightly to cover living costs.”

Impact on investments in stocks and shares ISAs and pensions:

“The value of your long-term funds, such as those held in stocks and shares ISAs and pensions, is not immune from inflation, although the virtue of these longer-term investment vehicles is that over time, they should ride out the impact of inflationary periods.

“But if you check in on the value of your funds now, you might be disappointed. Inflation, together with the interest rate rises designed to curb it, are changing the dynamics of stock market investments. Choosing what to invest in has become more difficult. Some growth investments that had been performing well are now declining in value, while other ‘value’ stocks and safe havens are performing better.

“Don’t panic. If you don’t need money held in your pension or ISA in the short term, be patient and avoid selling at a loss. If you do, consider delaying accessing it if your portfolio has suffered.”

Impact on savings

“Inflation is eroding the value of fixed-interest rate savings at a rate of knots – money in savings accounts is actually losing value every day. Until interest rates on savings rise sufficiently to counteract the impact of inflation, it makes sense to only keep what you need in emergency savings and anything else you have left spare, consider investing for the longer term. Your money has more chance of beating inflation this way – although that’s still not guaranteed and stock markets have also suffered in recent weeks.”