What Does the Cost-of-Living Crisis Mean for People Approaching Retirement? 

Table of Contents

  • Cost-of-Living Crisis: People approaching retirement should pay close attention to their current plans and create strategies to navigate inflation
  • As inflation rises, retiring people will need more money to cover their life essentials.
  • But as inflation rises, so are interest rates, bond income is rising, and the cost of annuities is falling. So far this year level annuity prices have fallen by around 25%.
  • .Wealth Management and at Retirement Specialists, Tideway offers simple actions people can take to navigate the current inflation crisis.  


A perfect storm of factors has compounded the threat during the curr cost-of-living crisis, said Tideway’s Head of Pensions, Sue Maydwell.

Inflation is now much higher than it has been over the last 30 years and is still rising. The Consumer Prices Index (CPI) rose by 9.0% in the 12 months to April 2022, up from 7.0% in March and increased in April alone by 2.5%.  

Central Bankers predicted that inflation would rise on the back of post covid supply chain issues but would be short-lived. The war in Ukraine is now compounding this post covid effect with supply shortages in the critical areas of energy and food.  

One ray of hope on the horizon is that there will be a deflationary effect from the slowing Chinese economy in the coming months, but it’s unclear how these contrary influences will play out.  

How does inflation affect stock markets?  

Rising inflation directly impacts the pound in our pockets. We need to spend more each month on essentials.

When base interest rates rise, the cost of borrowing money will increase, and deposit interest rates also go up but lag far behind the inflation figures. As a result, government gilt prices come down, and yields go up. 

Whilst short-term stock markets may be volatile, longer-term tangible assets like shares and property, which reflect inflation, will likely go up faster if inflation persists. Inflation also impacts the cost of annuities which generally fall. So far this year, level annuity prices have fallen by around 25%. 

The FTSE 100 index more than tripled in value from its launch in 1984 at 1,000 to 1994, during a period of high inflation. However, increases in the 21st Century with much lower inflation have been much more modest, with gains of only 25% in the last 20 years. 

“Workers in the last years of employment should put a strategy in place to avoid irreplaceable losses in their final retirement income. If they are unsure about what is the best thing to do is always wise to seek professional advice,” said Sue Maydwell.

What can people do during the Cost-of-Living Crisis?  

1- Despite attractive new deposit rates and headlines around volatile investment markets consider reducing your cash holdings and invest actively in real assets.

New deposit rates at 1.5% may seem attractive versus the zero-interest accounts we had become accustomed to, but even a 1.5% deposit return will be a negative 8.5% real loss after inflation. 

Not all share prices are collapsing. Higher risk-free returns and a change in sentiment are causing a reality check on many highly valued speculative shares, but ‘value stocks’ like banks, energy companies and insurance companies are rising this year. 

To make gains and avoid significant losses, you generally need to consider investing actively and avoid index funds. 

2- Plan your income withdrawals carefully, consider income-generating investments and try to avoid selling assets at a loss 

Investing for income has been out of fashion for the last ten years as big US tech companies that don’t pay dividends have dominated returns and index performances. But investing for higher and growing dividends is back in vogue. 

Remember, dividends and corporate bond coupons earned are generally more reliable than speculating on capital growth from investments.   

3- Review your Pensions for inflation protection 

Many close to retirement will be members of Defined Benefit Pension Schemes, also known as Final Salary Pensions. These were once heralded as the ‘gold plated’ pension option, given that the income is guaranteed. However, as the cost of running these schemes has increased, trustees have trimmed the benefits, including any inflation proofing. 

Defined Benefit Pension transfers have had a bad press over the last few years, but for many DB pensions in deferral (the time from leaving the scheme to getting your pension) could be a lot less golden than in accruing benefits whilst you were an active member of the scheme. Over the last few decades, many private sector schemes have reduced the increases in benefits from RPI to CPI (usually around 1% per year lower) and have introduced caps in indexation, sometimes as low as 2.5%. Often earlier guaranteed minimum pensions (GMP) through these schemes have no increases in payment. 

This means that such benefits in deferral and payment won’t have full inflation proofing anymore with a high risk of an eroding retirement income in real terms, as will be the case for last year, this year and probably next year.  

Dependant on an individual’s personal circumstances, this scenario suggests that a transfer to an invested pension (defined contribution) invested sensibly in real assets could offer better protection for people’s retirement as if bond yields continue to rise, transfer values will fall.  

Additionally, a transfer to a defined contribution arrangement, typically delivers more tax-free cash than is available from the defined benefit scheme pension, which allows individuals to manage their withdrawals tax efficiently. If a member can manage their withdrawals from tax-free cash and personal allowance in the early years, the initial draw on the fund will be less. 

Remaining in a Defined Benefit scheme will likely be in the interest of the majority of members,  indeed many remain wedded to the guaranteed aspect of the defined benefit pension even if that guaranteed income reduces in real terms over their retirement years. However, it is important to be aware and explore all options available. 

Check the terms of your Defined Benefit Scheme pension increases; how much inflation protection do you have? If you are concerned, seek expert advice on whether remaining in the scheme is the right course of action for you.

For those with defined contributions pension plans, it is also a good time to be speaking with an adviser and review your investment strategy and long-term sustainability of the fund. 

Many Workplace Pension Schemes have been designed with default investment styles, often known as Lifestyle strategies, with the aim of the member using the funds to purchase an annuity at retirement. However, data from the FCA suggests that less than 10% of pension funds are now used to buy an annuity. With most individuals choosing a flexible drawdown retirement, it is vital to ensure that you have a sensible asset mix that will grow at least as much as inflation. 

  • The content of this document is for information purposes only and should not be construed as financial advice.   
  • Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise 
  •  This paper is based on tax rates and allowances in place at the time of issue.  
  • We always recommend that you seek professional regulated financial advice before investing. 

Other articles by Sue Maydwell:

Gifting money to the next generation: When is the right time to help our children financially?