Cost of living crisis: Stop and think before you increase pension withdrawals

Driven by rising inflation and soaring fuel prices – an ongoing problem exacerbated by the war in Ukraine – the rising cost of living is creating difficulties for everyone.

For retirees, especially those in the UK, the cost of living crisis is presenting a particular set of challenges. Even those with a comfortable pension cushion may not be immune.

In fact, a report from FTAdviser stated between April and June 2022, 23% more people accessed their pension than during the same period in 2021. Although the average withdrawal was just£7,000, 508,000 people withdrew a total of £3.6 billion.

The chart below shows the reported value of taxable, flexibly accessed payments and the number of individuals accessing these payments between Q3 in 2017 and Q2 in 2022 – and highlights the marked increase in pension withdrawals.

Source: FTAdviser/HMRC

Increasing pension income may not be the ideal solution

If you’re struggling to meet rising costs or are having to compromise lifestyle choices, increasing your pension income may seem like a simple solution.

Further research, published by FTAdviser, suggests pension savers would need an extra £90,000 to maintain their standard of living because of rising costs, assuming investment returns of 5% a year, and 0.5% charges on a pot size of £330,000.

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. For a “luxurious” lifestyle, this rises to £3,000 a year.

For those taking a flexible income from a defined contribution (DC) pension, it’s easy to increase your withdrawals if you need to. However, before doing so, it's wise to consider the long-term consequences of doing so.

For example, taking more now may leave you vulnerable to running out of money in the future.

As you can tell, it’s important to consider the long-term effects before you take more from your pension to cope with the rising cost of living. So, here are three things you need to do before increasing your pension withdrawals.

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

1. Workout how much your expenses have increased

Before increasing your pension withdrawals, it’s important to get clarity on how much more income you need.

The UK inflation rate is measured by the Office for National Statistics (ONS). They calculate the rate of inflation by monitoring the fluctuating price of goods in an average shopping basket.

This means that your experience of inflation depends on what you spend your money on.

For example, the ONS assumes that an average household allocates 9.8% of their monthly budget on a car or other vehicle. So, if you don’t own a vehicle, your personal inflation rate might be lower than average.

Take some time to work out what your budget covers and review how these costs have changed in the last year. Alternatively, use one of the many online calculators to work out your personal inflation rate.

This exercise should help you to make informed choices about how you allocate your monthly income. It can also highlight areas where there's potential to cut costs and make savings.

It’s also 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.

Inflation is expected to remain high in the coming months. So, ensuring you have some room in your budget for potential increases in the future may be sensible, too.

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

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

Consider how long your pension will need to provide an income and how your needs might change in the future. Ignoring this issue could lead to financial challenges, including running out of money later 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.

Pension savings are often invested in the stock market. Withdrawing pension funds when markets drop means you have to sell more units to achieve the same level of income.

If you don't keep a check on this, you may end up eroding your funds quicker than you might have planned for.

If you need to increase your pension withdrawals but are concerned about how to achieve a sustainable long-term income, we can help. We will consider all your financial circumstances, including taxation and risk, and recommend ways you could achieve your goals now, without jeopardising your future plans.

3. Include other assets in your decision-making

If you need to boost your income, you may have other valuable assets you could use, aside from your pension savings.

If so, spending some of your other savings or investments might make more sense.

So, before you decide to increase your pension withdrawals, take some time to review your entire financial plan and consider whether other assets could be used to help tide you over in the short term.  

We can help you to review your retirement income needs

From long-term security to tax liability, there’s a lot to consider when deciding how to create the income you need. This can be a challenge when trying to understand all your options, and which solution is right for you.

We’ll help you review your retirement plan and can use cashflow modelling to illustrate what increasing your pension withdrawals may mean and show you how alternative solutions may be a better strategy.

Get in touch

If you’re worried about the rising cost of living and the effect it could have on your retirement plans, please get in touch. Within formation and support, we can give you the guidance you need to reach a decision you can be confident about.

Email us at or call us on +44 1689 493455.

Please note:

The content of this newsletter is offered only for general informational and educational purposes. It is not offered as and does not constitute financial advice.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not are liable indicator of future performance. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

You might also be interested in:

Weekly Market Commentary - 30 January 2023
Weekly Market Commentary - 23 January 2023
The 2022/23 end of tax year guide: 7 allowances to make use of before 5 April 2023
How to plant trees and help reforest the world in 2023, and beyond