Before you increase pension withdrawals as the cost of living rises, here’s what you need to consider

As the cost of living rises, you may be considering increasing how much you withdraw from your pension. While it could solve short-term challenges, it’s important that you think about how it could affect your future too.

Several factors, including the war in Ukraine and the long-term effects of the pandemic, mean that inflation is much higher than it has been in recent decades. In the 12 months to September 2022, the rate of inflation was 10.1%.

Your regular outgoings are likely to have increased, as well as the cost of discretionary spending, like holidays or days out. As a result, the budget you set out when you initially retired may not be adequate now.

If you’re struggling financially or are having to make lifestyle compromises, increasing your pension income may seem like a simple solution.

Data published in FTAdviser suggests that pension savers would need an extra £90,000 to maintain their standard of living because of rising costs. While costs will vary depending on your lifestyle, the research estimated that an income for a “comfortable” lifestyle would need to increase by £2,000 a year, and by £3,000 a year for a “luxurious” lifestyle.

If you’re taking a flexible income from your defined contribution (DC) pension, it’s easy to increase your withdrawals if you need to. However, you also need to weigh up the long-term consequences of doing so.

For example, could taking more from your pension now mean you potentially run out of money in the future? Or could taking a flexible income now place you under financial stress if something unexpected happens later on?

This is why it is important to consider the long-term effects before you take more from your pension to cope with the rising cost of living.

3 things you need to do before you increase your pension withdrawals

1. Calculate how much your expenses have increased

Before you increase your pension withdrawals, it’s essential you understand how much income you need.

While the rate of inflation can provide you with a good baseline of how much costs have increased, your personal inflation rate may be very different. Take some time to set out what your budget covers and review how these costs have changed in the last year.

It’s a good idea to split costs into essential and discretionary spending. This means you can understand what level of income you need and the extra that would allow you to live the lifestyle you want.

It’s expected that inflation will remain high in the coming months. So, ensuring you have some room in your budget for potential increases in the future can also make sense.

2. Understand how increased withdrawals could affect your long-term security

One of the challenges of accessing your pension is understanding how withdrawals will affect your long-term financial security.

To take an income with confidence you should consider how long your pension will need to provide an income and how your needs might change. Ignoring this issue could lead to financial challenges in the future, including running out of money in retirement.

Taking a higher income or a lump sum from your pension now can have a larger effect on your long-term wealth than you may think. As your pension is usually invested, you will need to consider how potential returns could be lower than you expect.

3. Include other assets in your decision

If you need to boost your income, you may have other valuable assets – don’t just consider your pension.

Depleting savings or investments could make more sense for you, so it’s important you review your entire financial plan and assets before you make a decision. There are many things to consider when deciding how to create an income, from long-term security to tax liability.

It can be difficult to understand what your options are, and which solution is right for you. If you need support when weighing up your options, you can contact us.

Do you want to review your retirement income needs?

If you’re worried about the rising cost of living and the effect it could have on your retirement plans, please contact us.

We’ll help you review your retirement plan with the current circumstances in mind. Whether you want to increase your withdrawals now or have confidence you could in the future if you need to, we’re here to answer your questions.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.