The horrible squeeze killing retirement incomes
Millions of pensioners are facing a hidden squeeze on their incomes, which could spell disaster for their retirement plans.
What's even worse is that if they have failed to adjust their spending to take account of the squeeze, they may unwittingly be storing up a financial nightmare for later in their retirement.
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The advent of pension freedoms gave pensioners more freedom to generate at least part of their retirement income from the returns on savings and investments - rather than buying an annuity. While this allowed them the freedom to tailor their income to their needs, it also exposed them to new risks.
With a decade of rock bottom interest rates, some of those risks are coming home to roost - and devastating retirement incomes.
The impact of rates
It has been ten years since the last Bank of England interest rate hike, and savings rates are at rock bottom. While once pensioners could look forward to double-digit interest on their savings, now they have to hunt high and low - and jump through endless hoops - to get more than 1%.
As a result, their incomes have suffered significantly. According to analysis by Key Retirement, for the tax year that ran from 2007 and 2008 - before the credit crunch - the average married retired household made £2,650 a year from investments and savings - which was around 11% of their retirement income. This year, while inflation has pushed the cost of living up, savings and investment returns have fallen to £2,200 a year. It contributes just 8% to the average married retired household's income.
These are just the averages too: if a couple has more of their money in a savings account and less in investments, they are likely to be suffering even more.
Dean Mirfin, technical director at Key Retirement said: "The squeeze on saving and investment income is a major issue for retired households and it is worrying that pensioners are still earning less than they did in 2007/08. The stock market has recovered and grown strongly since then but pensioners who mainly rely on cash savings are not seeing the benefits as rates have been at historic lows for more than eight years now. Even for those whose pensions have been invested through these stock market improvements many, if near to retirement, will have seen little benefit if their funds have gradually been managed through to predominantly cash to preserve benefits in the lead up to retirement."
To make matters worse, if pensioners are maintaining their income by eating into their savings or withdrawing cash from investments, it will mean they have even less money generating an income for them in future, so their returns for the following year will be even lower, and they will be forced to withdraw even more of their cash. This pattern repeats every year, with more and more of the savings being eroded each time, until there's nothing left.
What can you do?
It goes to show how important it is to take stock of retirement income on a regular basis, so you can see the squeeze clearly, and you don't accidentally keep eroding your savings without realising it.
The best solution to the squeeze will be different for each household. In some cases it means making even more cuts to spending. This gets trickier each time income is squeezed, but shopping around for everything from utilities to groceries can make a big difference.
For those with the risk tolerance, it may mean moving more of your money out of cash savings and into investments - as long as you can cope with the volatility that comes with the potential for additional growth.
In other situations it makes sense to take on some part time work to make up the shortfall - either finding a job, or considering how you can make money from your skills and hobbies.
In some cases your home can help solve the issue - either by renting out a room, downsizing or using equity release.
The complexity of this kind of decision means you may want to take advice, so you can track down the best solution for your circumstances, and be aware of all the implications.
None of the options will be desperately appealing, but all of them will be better than watching your savings being whittled away - giving you nothing to live on in the final years of retirement.
