Retirees are facing tough times ahead as costs soar

RETIREMENT is supposed to be a time when you take things easy, but some of the biggest financial responsibilities you will ever face loom at the end of your life. Serious illness, long-term care costs, funeral expenses and supporting younger family members can all squeeze your pension income.

Homeowners face other costs too, such as adapting their home for the demands of later life.

Funding this was hard before the cost-of-living crisis, but it is a big ask now as pensioners struggle to cover essential living costs today.

One in four over-55s are worried about their financial future as later life costs loom large, according to research from Aldermore Bank for the Sunday Express.

Only one in five feel they have saved enough towards long-term care costs, while half do not even know the value of their pension.

LIFE COSTS

While the average over-55 has savings of £58,215, one in three either has no pension nest egg at all or less than £20,000.Aldermore director of savings Ewan Edwards said this is a major worry: “Later life costs can be steep, and often unexpected, so building your savings early will soften the financial impact.”

Many struggle to save because they do not have enough money while others fail to realise the scale of the costs they will face.

The average Briton has saved £1,292 towards their funeral, and more than half believe this is enough.

Yet the average cost of a funeral is £4,056, according to the Sunlife

Cost of Dying Report 2022.

Similarly, people have saved on average £1,134 towards helping children go to university or getting on the property ladder, but tuition fees cost up to £9,250 a year and the average UK house deposit is now £32,841, Edwards says. Many underestimate the cost of adapting their home for later life, setting aside £955, while the Personal Social Services Unit reckons the cost can hit £16,647.

The biggest shortfall comes with later life costs.the average amount saved is £1,603 and one in five over-55s believes this is enough.

But Edwards warned: “The average cost of residential care is now £667 a week. In three weeks, those savings would be gone.”

CASHING OUT

While the nation built up their savings during lockdown, now they are raiding them.

Two years ago, 14 million Britons were failing to save anything.

That has now jumped to 23 million, Aviva research shows. It warned this number could grow further.

Those who are already retired face another challenge, which is to protect their income against the ravages of inflation. Consumer prices rose 7 per cent in the year to March, but best buy savings accounts only pay around 1 or 2 per cent.

Cash in the bank is plunging in real terms, said Becky O’connor, head of pensions and savings at Interactive

Investor: “Until interest rates on savings accounts are higher than inflation, they represent poor value.”

Most pensioners look to reduce their investment risk as they get older, but inflation is forcing many to take bigger risks with their savings. “To stand a chance of beating inflation, you need to keep money in the stock market for as long as possible, as shares have a better chance of growth than other asset classes such as bonds,” she said.

Most retirees now keep their retirement savings invested through drawdown, rather than locking into an annuity. “This allows your money to grow but there is also the risk it could fall in a crash, whereas cash is more reliable,” O’connor added.

RIGHT MIX

Pensioners should retain a balance between shares and cash, and should now consider buying an annuity, said Andrew Tully, technical director at Canada Life.

Today, a single man aged 65 with £100,000 can get level annuity income of up to £5,454 a year.that’s almost £1,000 more than last year.

Annuity providers have reacted to Bank of England base rate hikes faster than the big banks and Tully suggested combining an annuity and drawdown to give you the ideal combination of security and inflation protection.

“An annuity gives you a guaranteed income for life. Drawdown offers more flexibility over withdrawals, and hopefully your money will grow over time to offset the impact of inflation,” he said.

Tully said another option is to delay your retirement and continue working: “If you defer taking your state pension at age 66, you can claim it at a higher rate afterwards.”

The state pension does offer inflation protection as it should keep pace with price rises thanks to the triple lock, even if Chancellor Rishi Sunak did suspend the mechanism this year. He is expected to restore it for 2023/24 with the inflation number based on September’s figure, which is predicted to be 7.4 per cent.

That should give pensioners some inflation protection – especially if price growth eases later in the year.

Tully cautions that the average retirement can last for around 20 to 30 years, and the more money you save in advance, the fewer financial worries you will have.

‘Those who are already retired face another challenge, to protect their income against inflation’