{"id":1761,"date":"2022-05-17T05:52:09","date_gmt":"2022-05-17T04:52:09","guid":{"rendered":"https:\/\/evolvemyretirement.com\/blog\/?p=1761"},"modified":"2022-05-17T05:52:12","modified_gmt":"2022-05-17T04:52:12","slug":"the-cost-of-living-crisis-and-retirement-planning","status":"publish","type":"post","link":"https:\/\/evolvemyretirement.com\/blog\/the-cost-of-living-crisis-and-retirement-planning\/","title":{"rendered":"The Cost Of Living Crisis And Retirement Planning"},"content":{"rendered":"\n

In case you’ve just returned to Planet Earth, we’re currently experiencing a cost of living crisis. The annual rate of inflation has reached levels we haven’t seen for over 30 years. Just a few short months ago, this seemed unlikely. In fact we wrote about this<\/a> last year. But now we’re being hit from all directions. Energy prices are sky-rocketing. Food prices are soaring. National Insurance contributions are due to rise. In fact, almost everything seems to be getting more expensive. So what should we do now that inflation has raised its ugly head again? Let’s take a look at the options.<\/p>\n\n\n\n

Pension contribution holiday<\/h2>\n\n\n\n

Most employees are now auto-enrolled into pension schemes. If the cost of living increases mean you struggle to make ends meet, you may be tempted to opt out of auto-enrolment. Say you’re contributing the minimum 5% of your salary, and your employer is contributing the minimum 3% matching contributions. For every \u00a310,000 in gross annual salary, you’d stop contributing \u00a3500. That would result in more money in your pay packet each month. It sounds like a quick fix, but it has several major drawbacks:<\/p>\n\n\n\n

  1. You’d lose your employer’s 3% matching contributions. These were tax-free. So for every \u00a310,000 salary you earn, you’d lose \u00a3300 per year tax-free pension contribution; that’s \u00a3300 per year in free money.<\/li>
  2. You’d lose the tax relief on your own 5% contributions. For every \u00a310,000 you earn, this would amount to \u00a3100 per year if you pay tax at the basic rate, or \u00a3200 per year if at the higher rate. So instead of your net pay increasing by \u00a3500, it would only increase by \u00a3400 (if basic rate) or \u00a3300 (if higher rate).<\/li>
  3. Your pension plan would lose the combined contributions of \u00a3800 for every \u00a310,000 salary. This will reduce the future value of your pension plan when you eventually retire.<\/li><\/ol>\n\n\n\n

    The downsides of doing this are clearly explained in a recent Which? article<\/a>. The bottom line is that you should only consider cutting down on pension contributions, even temporarily, as a last resort.<\/p>\n\n\n\n

    Reduce non-pension savings<\/h2>\n\n\n\n

    Apart from any pension contributions, you may have been thriftily saving elsewhere; for example into ISAs or other types of investment. In a cost of living crisis, it may seem natural to cut down on these savings and investments. It’s true that you wouldn’t lose any ‘free money’. Nor would you lose any immediate tax relief. But cutting down saving means you’re raiding your future to pay for your present.<\/p>\n\n\n\n

    To some extent, you always need to balance present and future needs. Economists call this Consumption Smoothing<\/a>. But this involves balancing spending and saving. The tempting approach is to increase spending in good times, and to reduce saving in bad times. This is not balancing, and over time will erode away your future finances.<\/p>\n\n\n\n

    Cut the cost of living<\/h2>\n\n\n\n

    Cutting the cost of living may sound like a contradiction in terms during a cost of living crisis. But it’s worth remembering that there are two types of spending:<\/p>\n\n\n\n

    1. Essential spending. This is spending on what we need<\/em>.<\/li>
    2. Discretionary spending. This is spending on what we want<\/em>.<\/li><\/ol>\n\n\n\n

      There might not seem to be much you can do about essential spending. But still, there may be savings you could make. For example:<\/p>\n\n\n\n