Steven Cameron, Pensions Director at Aegon said: “December’s inflation increase of 5.4% comes a year after inflation was 0.6% in December 2020, just above zero. One year on, households are facing an ever worsening cost of living crisis with inflation at the highest rate for almost 3 decades*, making it higher than under 30s have experienced in their lifetimes. What’s worse is there’s no short-term respite in sight as without Government intervention, the energy price cap is rise set to drive inflation even higher in the spring, coupled with a National Insurance hike and income taxes on the rise due to frozen thresholds.
“Individuals across the generations are concerned about rising prices. Aegon research showed almost two in three adults were worried about the impact of rising prices on their personal finances even before the increases over the last two months.
“Today’s further increase will put even more pressure on the government to offer some respite to the millions of households facing a cost of living squeeze. State pensioners and those receiving benefits are in the spotlight with increases based on September’s inflation rate of just 3.1%. With inflation now approaching double that at 5.4%, it could be a case of one step forward but two steps back as state pensioners and those on benefits may see the coming April increase wiped out twice over in terms of their purchasing power.
NI increase needed to help long term social care funding crisis
“The Government is facing a barrage of calls to think again, whether to grant a higher increase to state pensioners, to reduce taxes on fuel or to defer April’s National Insurance increase. If fuel price hikes are seen as temporary, a limited period of tax reductions there would be welcomed. However, deferring the increase in NI will only worsen the crisis in social care funding, which it’s designed to address. Time is also running out for any improvement on the 3.1% state pension increase, with any movement there putting further pressure on today’s working population who pay for this through today’s National Insurance.”
*The increase in CPI has not been higher since it sat at 7.1% back in March 1992
Emma Byron, Managing Director, Legal & General Retirement Solutions comments: “As inflation hits record levels, it’s understandable that people are increasingly anxious about managing their money and protecting hard-earned savings. The situation is particularly tricky for retirees, who also face lower than expected state pension increases, forcing many to reconsider how to achieve a reliable source of income in later life.
“This period of higher inflation will prompt many to reassess their finances. But where to start?
• Start with a personal financial audit. Take stock of your current situation - including debts and outgoings- to get an idea of what pressure inflation might put on your money.
• Try and maintain a cash buffer. The usual rule of thumb is three months’ worth of salary but even a small amount will add up and can make all the difference. The pandemic has taught us that it’s sensible to always have a cash buffer in times of uncertainty, no matter how small that pot might be.
• Invest in your savings and pension pot. Cash in the bank is likely to earn very little interest and will lose value over time so check your money is working hard enough for you.
• Review household spending. Budgets aren’t the most exciting, but they are necessary and can make a real difference in getting to the end of the month with some money to spare. Try to see where you can tweak spending to help ease the pain of hefty household bills. Websites like MoneySavingExpert offer some useful budgeting templates.
“Managing money effectively does require sustained effort and attention, but a regular review of finances is important to ensure your plans for retirement don’t get blown off course.”
Andrew Tully, technical director, Canada Life commented: “The cost of living squeeze is getting ever tighter, and today’s numbers paint a bleak picture with no relief on the horizon. Wages are lagging inflation, energy costs are set to rise by more than 50%, and economists still expect inflation to peak over the coming months. We are in the eye of the storm and it will be interesting to see what happens at the next MPC meeting in early February around interest rates.
“In the meantime, people are going to have to strap in and hold tight, as the reality is the average UK household will need to spend over £1,500 extra this year if they wish to maintain current living standards.
“The rising costs of living can disproportionately affect people with fixed incomes, including retirees who typically live off pension income. Building some form of protection against the ravages of inflation is important if people want to maintain their living standards.
“Very few people currently buy an inflation proofed income at retirement. Retirement accounts can create the flexibility for people to bank a guaranteed income to pay the bills while also leaving money invested to pay for life’s little luxuries and help protect against inflation.
“A professional financial adviser can help you decide the best course of action for your personal circumstances and ensure you stay on track to enjoy the retirement you have worked hard for.”
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