From homeowners to retirees, the impact of inflation is undoubtedly widespread.
State pension recipients are somewhat cushioned by the triple lock, and those in income drawdown will have the flexibility to take more from their pension pot, says Faye Church, chartered senior financial planner at Investec Wealth.
But the affordability of any increased withdrawals would need to be assessed, she adds, as well as the effect on the value of the saver’s pension over the longer term, for fear of retirement savings running out within their lifetime.
In a time of high inflation, the flexibility that drawdown provides is a facility that some clients are making use of.
“The rate of inflation being where it is, I’ve seen an increased demand from clients for additional income that wasn’t previously planned for,” says Ian Cook, a chartered financial planner at Quilter. “This has created a level of uncertainty with people who are in drawdown.”
While inflation has led some to take more out of their pension, Cook says he has not seen the reverse among clients who are still accumulating.
“On the savings side, I haven’t seen a discernible impact just yet. People are still in the accumulation phase, so they’re more focused on the day-to-day running of their lives, and their jobs.
“I’ve not seen an increase in the level of contributions that clients have been putting in their plans as a direct result of inflation. The conversation more centres around, ‘Will I perhaps need to delay my drawdown date, or my purchase of annuity date?’”
The upside of rising interest rates
Some clients may be wondering whether they need to delay buying an annuity, but the product’s appeal is apparent in a high interest rate environment.
Sales of annuities rose 22 per cent in the first three months of 2023, according to the Association of British Insurers. Sales of escalating annuities, which provide an income that increases every year, also grew by 23 per cent.
“More ever than before, I’m starting to bring the annuity conversation into the context of a discussion with clients, where that has largely been off the table for a while,” says Cook.
“The difficulty you’ve got with the annuity conversation is, we’re in a little bit of a see-saw in that annuity rates have gone up, [and] investment values have gone down. What we actually want is annuity rates to stay high, and investment values to catch up a little bit.
“Although the rates are attractive, where clients have not seen much of a return on their investment, or even a decline in some cases, they might be purchasing an annuity but not able to buy the right amount of income because the pot’s not quite big enough, because we’ve not seen the growth.”
