Expert Tips To Manage The Cost Of Living Crisis
Expert Tips To Manage The Cost Of Living Crisis

Expert Tips To Manage The Cost Of Living Crisis

Just one look at the news will tell you times are tough right now. With soaring inflation comes higher food and utility costs, while geopolitical instability has sent fuel prices rocketing. All of that’s bad enough if you’re still working and receiving a regular salary each month but, later in life, you’re more likely to be living off capital and fixed pension payments. To find out how best to manage we asked four financial experts to share their insights…

Alistair McQueen

Head of Savings & Retirement at Aviva, says…

The main drivers of inflation today are global. First, the global pandemic, and associated lockdowns, resulted in the restriction of international supply chains. And when the supply of goods could not keep pace with demand, this has resulted in higher prices. Second, the war in Ukraine has accelerated increases in energy and food prices. As the supply of energy and food from the region of conflict has been restricted, and as geopolitical uncertainty has increased, the prices of energy and food has also increased.

The Bank of England currently expects inflation to rise further to 11% in the second half of this year. However, they acknowledge that there is a significant degree of uncertainty in projecting future inflation. It will be influenced by developments related to the pandemic and the future of the war in Ukraine, both of which are very uncertain. There is also uncertainty about the degree to which these global pressures will be compounded by domestic pressures, specifically the behaviour of the UK labour market. It is well known that there are a record number of vacancies in the UK labour market today. If this was to translate into an acceleration of wages, in a bid to fill vacancies, this could drive further domestic inflationary pressures. 

Our own inflationary experience will be influenced by our own spending pattern. If, for example, we spend more of our budgets on goods experiencing higher inflation, our personal inflationary experience will be above the headline average. The data shows that older people today are experiencing above average levels of inflation (above 9.1%). This is being heavily driven by older households spending a greater proportion of their weekly budgets on domestic energy. And domestic energy is experiencing significant annual inflation, as global energy prices rise. Older people, in retirement, typically have lower incomes. And a greater proportion of their budgets are allocated to essentials, such as energy.

For those in retirement, the main source of income is typically the state pension. Fortunately, this pension benefits from the ‘triple lock’ which ensures it will increase by the highest of either wage inflation, price inflation or 2.5% each year. With inflation, this suggests that state pension recipients can expect to see it rise in value by about 10% in April 2023. But despite the support of the rising state pension, inflation will bring pressures to the otherwise fixed incomes of those in retirement. The need for those in retirement to carefully manage their budgets at this time of rising prices will be greater than ever. 

None of us can completely shelter ourselves from the impacts of rising inflation, but that does not mean we are powerless to act. Three simple steps include:

1. Shop around, when saving: In addition to shopping around when spending, it’s also important to consider shopping around when saving. As inflation is rising, savings interest rates are also rising. Small increases in savings interest rates could help make your money go further.

2. Get free help: There is a lot of free support, to help people manage their money. A primary source of help is the government’s MoneyHelper site. For those who are considering their pension options at retirement, the government-backed “Pension Wise” can provide free help.  

3. Professional help: The providers of free help will tell you what you “could” do to help you manage your money. If you want someone to advise you what you “should” do, this could be provided by professional financial advice. This comes with a cost. If you are interested in seeking professional financial advice, the government’s Money Helper website maintains a register of advisers.

Since 2015, those with private pension savings have been given much greater choice in how they can often access their pensions. Dependent on individual pension terms and conditions, pension savers are often given the following access options from age 55:

  • Full access to pension savings
  • Partial access to pension savings
  • Use of pension savings to purchase an annuity
  • No actions – i.e. leaving money in the pension for a later date

This choice can be helpful in using pension savings to navigate the cost-of-living pressures. But it needs to be remembered that a pension is designed to fund the rest of our life. So accelerated withdrawals today could result in depleted funds later in life and have income tax implications. Pension income is subject to income tax, therefore accelerated withdrawals could trigger higher income tax liabilities.  In summary, pension savings could be of use at this difficult time. But it is important to look before you leap. The government-backed Pension Wise service gives free guidance on how individuals can consider accessing their pension savings.

The BANK OF ENGLAND currently expects INFLATION to RISE further to 11% in the SECOND HALF of this YEAR.

Louise Higham

Financial Planning Director at wealth management firm Evelyn Partners, says…

I agree that there will be more pain to come in the next 12 months. We still have the next energy price cap hike to come in October, which could increase the average household energy bill to £2,800-3,000, after which the Bank of England expects inflation to hit 11%. Grocery and other consumer prices will keep rising during that time, although it’s to be hoped that the rate of increase will be moderate. Much will depend on what happens to wholesale oil and gas prices, and also whether bargaining for higher pay in the labour market keeps fuelling inflationary pressures. The Bank of England expects inflation to come back down to 2% by early 2024.

Rising prices and a fixed income mean falling spending power and a reduced standard of living. This must be accepted to an extent, as almost everything in the inflation basket is getting more expensive, and even middle-class households who have never had to budget before are starting to feel the pinch. But those who spend a higher proportion of their disposable income on groceries, energy bills and car fuel or other transport – and many of those over the age of 60 fall into this category – will feel the rising costs most. So, any measures that reduce these parts of expenditure will free up funds for other expenses.

Those with outstanding mortgage debt on soon-to-expire fixed-rate deals should start looking for the best remortgage deals as soon as possible (usually three to six months before a deal expires). The Bank of England has warned that it is prepared to hike rates aggressively to control inflation.

It is also worth noting that when the 1.25% National Insurance rise – which does not affect pensioners – is converted to a healthcare levy and tacked on to income tax in the next tax year, this will increase many retirees’ income tax bills. One piece of relatively good news for those in retirement is that next year the State Pension will be adjusted by inflation under the terms of the pensions ‘triple lock’ – and this will be determined by September’s consumer prices index. However, that increase will only kick in next April. Other advice I’d share is make sure that your National Insurance Contributions record is paid up so that you are due the full state pension on retirement, as this is an essential component of retirement income even for retirees with a private pension. You can check the state pension you are due with HMRC and also receive guidance as to whether extra payments made now will improve your payout.

While share and bond prices are volatile, try to draw on cash savings rather than drawing down on pension investments that are currently trading below par and therefore crystallising losses.

A good cash buffer is more essential now than ever. But while at this age it is generally advisable to have one or even two years’ worth of living expenses in cash, make sure the rest of any savings or pension pot is invested in a way that will generate returns that have a better chance of keeping up with inflation. Monies that are not needed for seven years or more could be considered for investment in funds that target stock market growth as well as income.

If you have yet to decide what to do with a private pension, don’t write off using part of it for an annuity. These provide a regular guaranteed income, and used to be the default option, but have fallen out of favour in recent years because they have represented poor value. But annuity rates are now at their highest in eight years and you can use a portion of a pension pot to purchase one and lock in, alongside the state pension, a basic assured income while leaving the rest to earn returns as investments that can be drawn down as needed.

If dependents need help in the short term, there are various gifting allowances that allow you to make cash gifts without any tax being liable from either your estate or the recipient. The ‘annual exemption’ means you can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate – either to one person or split between a number of people. You can carry any unused annual exemption forward to the next tax year – but only for one tax year.

The small gift allowance permits as many gifts of up to £250 per person as you want each tax year, provided you have not used another allowance on the same person. Each tax year, you can give a tax-free gift to someone who is getting married or starting a civil partnership: £5,000 to a child or £2,500 to a grandchild or great-grandchild. You can make regular payments known as ‘normal expenditure out of income’ too for instance to pay rent for your child or pay into a savings account for a child under 18.

Other benefits and support available to the elderly include Council Tax reductions, £650 extra energy funding help from the government, the Warm Home Discount, the Cold Weather Payment, dental and optical treatments, public transport concessions such as a free bus pass and, for the over-75s, a free TV licence. The Department for Work and Pensions has announced new payment details for the 2022/23 Winter Fuel Payments which will include a £300 ‘Pensioner Cost of Living Payment’ for eligible households – in addition to the £400 of support every household will receive. This means Winter Fuel Payments will be increased to £500 for a household with someone of State Pension age and under 80, and £600 for a household with someone aged 80 or over. Those aged 66 or over, who have a total income of under roughly £200 a week, could be entitled to Pension Credit that can be as much as £3,300 a year. This can also be a gateway entitlement to some of the support mentioned above. There are also a variety of benefits relating to disability and carers that should be examined as appropriate.


Samuel Leach

Director of Samuel & Co Trading, says…

As the rate of inflation is considerably high this will mean fixed pension payments will reduce considerably, so pensioners living off a state pension will feel the pinch more than someone who has a job and receives an increase in pay closer aligned to the inflation rate. As costs are likely to continue to rise, it is worth reviewing your expenditure. Start with renegotiating your bills, shop around and use comparison websites to make sure you are on the best deal. When it comes to energy, try and fix your rate so you can budget accordingly. 

The best place to start is to review your monthly expenditures and direct debits. See if there are any expenditures that you can go without. You’ll be surprised by the amount you can save by simply cutting out a few ‘small’ monthly expenditures. It is all about making your money work for you and making your money go as far as possible. Review your current insurance policies and go to comparison websites to see if you can get a better deal. Again, this could save you a lot of money over the next year. Same with your energy bills, can you get onto a fixed rate? Speak to your provider and shop around to get the best deal for you. 

Also, find out if you are entitled to any benefits, such as council tax reductions and reduced utility tariffs. You can check what you are eligible for using the government-approved benefits and grants calculator. If you are struggling to pay for essentials such as food, you can check to see if you qualify for the Household Support Fund. It’s designed to offer financial support to help pay for essentials such as food, clothes and utilities. The government recently increased its funding for the scheme from £500m to £1(bn).

Be smart with your money, review your expenses and cut back where you can to make your money go further. Shop around for deals on your bills using comparison sites. You’ll be surprised how much you can save by simply cutting back on unnecessary expenditures. You can go further by reviewing your lifestyle and use less energy or fuel. Further ways are by paying off your credit cards so you are not paying the interest or, if you can’t afford to pay off the debt, look for balance transfer offers where you can transfer the balance for free and have interest-free payments for a set period of time.

Be SMART with your money, REVIEW YOUR EXPENSES and cut back where YOU CAN to make your money GO FURTHER.

Zoe Dagless

Senior Financial Planner at Vanguard UK, says…

First, lean on other sources of income. Do you have a lodger? Could you sell some assets (for example, do you need two cars)? Then, instead of taking a fixed percentage amount from your pension pot each year and then adjusting it for inflation, adjust your income depending on how markets fare; take more out when markets do well and less when they don’t, but do it within a pre-determined range by setting a ‘floor’ and a ‘ceiling’ for yourself. Also, review your investment costs. Look at the things you can control; one of them is investment costs – the higher the fees, the less there is available for you to spend. Finally, review your expenditure and ensure you are taking maximum advantage of concessionary fares and stay the course with investing. Markets will be volatile and sometimes the best thing you can do is nothing. Investors often fare better when they don’t try and time the market, especially because the “best” and “worst” trading days often occur close together. 

One common strategy used by those in retirement is to set an annual level of income from the portfolio, and then annually increase it in line with inflation. This provides a high level of certainty about what ones year-to-year income is likely to be, at least in the short term. But this can sometimes yield an amount that is unsustainable in times of a down market. To avoid that, an alternative would be to only spend a set percentage (such as 4%) of the portfolio every year. However, staying flexible and using a ‘dynamic spending’ approach results in an even more favourable and sustainable outcome for retirees. As described above, this approach entails either increasing or decreasing your percentage of income (depending on how your portfolio has performed in that year), subject to a ‘floor’ and ‘ceiling’ as appropriate.

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*DISCLAIMER: Anything written by SheerLuxe is not intended to constitute financial advice. The views expressed in this article reflect the opinions of the individuals, not the company. Always consult with an independent financial advisor or expert before making an investment or personal finance decisions.

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