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Opinion: The cost of living crisis is eating into disposable income - can Budget 2023 help?

Financial advisor Ralph Benson has some tips in relation to pensions and savings to be made ahead of Budget 23.

Ralph Benson

BILL GATES ONCE said we overestimate the change that can happen in a couple of years – and underestimate how much can change in a decade. That story seems to be playing out in 2022 as Ireland navigates the cost of living crisis.

New research by B&A commissioned for Pensions Awareness Week, which runs from 19-23 September, shows that the cost of living crisis is playing out in disparate ways for different people in Ireland. The preliminary findings show that there are two sides to the story.

In one corner are those who already had surplus income each month. Most people in that position can get by now with relatively minor adjustments to their finances.

On the other are people for whom the cost of living increases means major changes. They are making decisions today which will have a long-term effect on their wealth. In particular, it will affect when they can retire, and how much they will have to live on when they do.

Worrying numbers

Our research shows that among people in Ireland who have no pension, 42% have either delayed starting a pension or delayed when they plan to retire – as a result of the rise in the cost of living.

For sure, these changes ease the pressure today. But it means that these people will be living with the consequences of this inflationary period for many years to come. It’s a long way from what we were led to believe less than a year ago. At that point, we were being confidently assured that inflation was just transitory. People who had built up savings and paid down debt during 2020-21 had repaired their finances, and this was driving a level of pension take-up.

For those who already hold pensions, the situation is quite different. The majority have been able to weather the storm. In fact, 69% of pension holders surveyed say that the increased cost of living has had ‘no impact’ on their level of retirement saving.

Nevertheless, one in five pension savers is also paring back their retirement plans as costs rise. They have either cashed in their pension, stopped or reduced the amount they are paying in, or pushed out their planned retirement date.

Some simple actions you can take today

There is plenty you can do to minimise the long-term impact of rises in the cost of living. So what should you do today to give yourself the best chance of long-term prosperity?
First, orientate yourself.

What is your month-on-month financial situation, and how do you need to change it? What’s your pension position? Our research reveals that most people haven’t checked the performance of their pension, despite a dramatic few years in investment market. Fewer still have calculated how much they will need in retirement. To form an idea, take a look at our pension calculator.

Second, cut back in a sustainable way. Everyone knows that cutting discretionary spending makes sense: that’s obvious. But if you can eliminate regular monthly outlays, that is even better, because it delivers an ongoing benefit. Look for unnecessary direct debits.

Simply scan your online banking to see what you’re what is going out each month. Many of us are surprised to discover the subscriptions we’re on the hook for. If you do need to pull back on financial items, focus on shorter-term investments with less tax benefit than your pension, or even redundant costs, such as excessive insurance cover.

Lastly, if you can avoid it, try not to cut back on what you’re paying into your pension. A €100 reduction in your personal pension contribution can result in a €333 loss to your pension pot when you consider missed employer contributions and tax relief.

If you do decide to reduce your pension payments, bear in mind that you may be able to catch up later as cost of living pressures abate. You can claim tax relief on pension contributions from this year’s earnings as late as October 2023.

Can Budget 2023 save the day?

There’s a clear demand for measures to support people through this period of rising prices when Budget 2023 is announced on 27 September. What’s important is that the initiatives help shore up the long-term wealth of households, and not simply the profits of energy providers.

In particular, there is an expectation that tax credits will be adjusted to take account of inflation, and that the government will focus extra support on protecting the financial position of lower-income families.

That will doubtless be welcome even though it comes at an overall cost to the taxpayer. In the meantime, there’s a lot you can do yourself to protect your long-term financial wellbeing.

Ralph Benson is co-founder and head of financial advice of online investments and pensions advisor Moneycube.ie, and co-founder of PensionsAwarenessWeek.ie. PAW22 runs from 19 – 23 September.

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Ralph Benson

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