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5m adults say their living costs have risen by at least £500 a month

21/04/2022
RETIREMENT

 

  • Average living costs for consumers have risen by about £2,600 a year and one in 10 of those with extra living costs say they are struggling to pay for food and heating
  • Inflation is eroding their savings but only a third of consumers are considering moving money into higher-risk investments

Research from pensions and retirement specialist LV= highlights how rising inflation is affecting UK consumers. 
The LV= Wealth and Wellbeing Monitor* - a quarterly survey of 4,000+ UK adults – reveals:

  • 25% (13m) of UK adults say their monthly living costs are £250 higher than a year ago and 9% (5m) say their monthly costs have risen by £500 or more
  • Retired people have seen their living costs rise on average by £163 a month- nearly £2,000 a year
  • 13% (6m) of those with extra living costs say they are struggling to pay for heating and 10% (4m) are struggling to pay for food

How people are coping with rising living costs

People with rising living costs say they are adopting a variety of ways to make ends meet

  • 36% (16m) are saving less
  • 34% (15m) are buying cheaper brands
  • 30% (14m) are having fewer holidays and meals out
  • 23% (11m) are dipping into savings
  • 19% (9m) have cancelled some subscriptions
  • 8% (4m) are taking on more credit card debt and loans
  • 5% (2m) have asked friends and family for help
  • 5% (2m) are paying less into their pension 
  • 5% (2m) have cancelled some insurance policies

    What people are doing with their savings
    Inflation is eroding the value of consumers’ savings but many are worried about moving their savings into higher-risk investments
  • 31% (16m) are considering moving (or already have moved) money into a higher-risk investment to achieve more long-term growth
  • But 63% (33m) would avoid moving money into higher-risk investments because they are worried about volatility

For many people inflation is an unseen danger to their finances
LV=’s research indicates that a significant minority of people are unaware how inflation affects their savings;

  • One in four adults (25%/ 13m) are unaware that inflation can reduce the value of savings (if inflation is great than the interest rate on their savings)
  • Younger people are less likely to understand the impact of inflation on savings. Some 34% of 18-34 year olds don’t understand the impact of inflation on savings compared to 14% of over-65s 

How inflation can damage retirement savings

How inflation can damage retirement savings
Increased cost of living may cause those in retirement to withdraw more of their pension savings each year than originally planned.  Savers who draw down a larger income from their pension run the risk of exhausting their pension fund, depending on their pension’s growth rate. The table below shows how a £200,000 pension fund could last 28 years if £12,000 a year is withdrawn, or 15 years £18,000 a year is withdrawn. (Figures assume 4% growth rate)  

 
The following table shows the impact of income withdrawal on a pension fund and illustrates how long the pension fund will last, assuming different annual growth rates.

 

How long will a £200,000 pension fund last?
 Annual income  £9,000  £12,000  £15,000  £18,000  £21,000
 Annual growth rate Number of years before pension runs out
 1%  26  19  15  12  11
 4%  53  28  19  15  12
 7%  -  -  35  21  16
“The LV= Wealth and Wellbeing Monitor provides an interesting insight in the hopes, fears and aspirations of people approaching and in retirement.

“Inflation fears have been rising since summer and rising prices pose a problem for retired people. Those on fixed incomes will see the purchasing power of their incomes fall. Those drawing an income from their pension fund may be forced to withdraw more money from their pension fund than they anticipated and increase the risk of running out of funds in retirement.  

“One likely reason why over 55s are more worried about inflation is that they typically have a larger proportion of their savings in deposit accounts that are not keeping pace with rising prices. Wealthier households are probably more confident because they tend to have a great proportion of their investments in real assets such as equities and property, which have risen in value over the past few years.

“Rising inflation poses a dilemma for cautious investors. They are generally uncomfortable with the volatility that investing in stock market-based funds can bring but are also concerned that their savings fail to keep pace with rising prices. One option for them is a smoothed fund that invests in a wide range of assets but which helps to smooth out the ups and downs of the stock market.

“People in this position should consult a financial adviser, and this is especially true for people who plan to retire within the next five years.  A qualified financial adviser will be able to help clients choose the most suitable investments and create cashflow models to ensure and their retirement income is secure.”
 
 
Clive BoltonManaging Director of Savings and Retirement at LV=

Notes

* The LV= Wealth and Wellbeing Monitor is a quarterly survey of 4,000+ consumers which examines their attitudes to spending, saving and retirement. LV= surveyed 4,000+ nationally representative UK adults via an online omnibus conducted by Opinium in December 2021.