Richard Parkin, head of retirement at BNY Mellon Investment Management, draws on the company’s latest research to consider how higher levels of inflation and interest rates could affect people’s retirement plans.

The grim reality of rising prices is prompting a reappraisal of retirement plans for many people. They recognise that they will need a higher income in retirement, at a time when weaker financial markets have depleted their savings. Many people are now delaying their plans for retirement, or looking for additional work to boost their savings¹ . For advisers, it may also demand an alternative approach. 

Until the end of 2021, inflation had been benign for much of the previous 30 years. There were spikes, such as those in 2008 and 2011² , but they were small and short-lived. In spite of significant monetary stimulus during the post-financial crisis era, inflation appeared to be a problem for a bygone era. This assessment proved naïve: rising prices have become remarkably persistent, peaking at over 11% in the UK in October 2022³  and pushing central banks to raise rates sharply.  

While the rate of inflation has started to drop, aspiring retirees still need to find another 20% of income to achieve the same standard of living they had hoped for just two or three years previously⁴ . While the problem may be more acute for those on the cusp of retirement, it is also having an impact for clients already in retirement, who may face an uncomfortable choice between drawing down more heavily on their retirement funds, or paring back their lifestyles. 

It is tempting to believe that advised clients are sufficiently wealthy not to notice creeping price rises. No doubt they are better able to withstand inflation’s impact than many, but three-quarters of the advisers we surveyed for our report, Life Beyond Work: the changing face of retirement⁵ , put it as a key concern for clients. More than 80% said they expect this concern to rise in intensity over the next few years⁵. Even if their personal balance sheet is strong enough to withstand inflation, many find themselves increasingly required to support elderly relatives, or grown-up children, who are facing real hardship. 

Client concerns

According to our research⁵, advisers say clients’ biggest concern for retirement is the ability to maintain a desired lifestyle, cited by 90% of respondents, followed by building adequate savings, cited by 86% of respondents . Higher inflation has made both these ambitions harder. The incoming generation of retirees may already have higher costs than previous generations, potentially required to support elderly parents, while still maintaining education or housing costs for their children.  

Postponing retirement and reducing withdrawals are the most common ways clients look to mitigate economic pressures and the rising cost of living. While only 10% of advisers cited the increased cost of living as their clients’ top-ranked concern, 75% mentioned it, and in practice, it feeds into all other areas. Our survey showed that there is even a portion of advised clients thinking of going back to work: for advisers, there is a concern that this will be seen as a failure of planning. 

Retirement portfolios

The other major consequence of rising inflation is its investment impact. The sharp rise in interest rates has destabilised financial markets and forced a reappraisal of investment portfolios. Not all of this is bad: for example, it is now far easier to generate a high and stable income from lower risk assets, such as government or investment grade bonds. However, it has changed the landscape. 

This more challenging economic and market environment is already leading advisers to review their approach. Around a quarter of respondents to our survey⁵ who do not already operate retirement-specific portfolios expect to change the way they structure retirement portfolios, with a further quarter unsure whether they will or not. There is a revival in annuities, for example⁶ . Nearly two-thirds of advisers surveyed expect their use of lifetime annuities to increase and over a third expect to use temporary annuities more.

It has also made investing a tougher sell for advisers. Investors have experienced significant financial market volatility over the past 18 months, including real weakness in lower risk assets such as government bonds. Investors can readily generate an income of 4-5% in a savings account, which has some appeal for clients weary of market turmoil. Indeed, in our survey, 44% of advisers cited the risk of clients moving to cash as a key business challenge. The danger is that the protective effects of an equity portfolio in preserving the real value of savings over time may be lost at a time when they are needed most. 

It may also change the view of drawdown. The growth in drawdown has been set against the backdrop of benign markets and has worked very well for advisers to date. It has become more challenging as markets have weakened and advisers will need a robust explanation as to why it is still worth considering. 

Wealth does not always come with financial confidence. For those watching their bills climb each month, knowing that they cannot re-earn their retirement wealth, the rising cost of living is frightening. Our survey showed that it is the emotional aspects of advice that clients value most – the reassurance and knowing their future is taken care of. Advisers can add real value by supporting clients through the cost-of-living crisis. 

¹  Source: Legal and General, 2.5 million plan to delay retirement due to cost-of-living crisis, 14 December 2022 https://group.legalandgeneral.com/en/newsroom/press-releases/2-5-million-plan-to-delay-retirement-due-to-cost-of-living-crisis#:~:text=The%20cost%2Dof%2Dliving%20crisis%20is%20another%20in%20a%20series,Brexit%20and%20rising%20living%20costs.

²  Source: Inflation rate for the Consumer Price Index (CPI) in the United Kingdom from January 1989 to October 2023, 15 November 2023, https://www.statista.com/statistics/306648/inflation-rate-consumer-price-index-cpi-united-kingdom-uk/

³  Source: Bloomberg. UK Inflation Hits 41-Year High on Soaring Energy Prices. 16 November 2022. 

⁴  Source: Pensions and Lifetime Savings Association’s Retirement Living Standards. 12 January 2023

⁵  Source: Research conducted by NMG Consulting for BNY Mellon Investment Management between June and July 2023, based on responses to an online survey with 202 retirement-focused financial advisers.

⁶  Source: Financial Planning Today, Financial advisers driving annuities revival, 24 May 2023 https://www.financialplanningtoday.co.uk/news/item/16066-financial-advisers-driving-annuities-revival