Eight steps to stop the cost-of-living crisis derailing your financial future

With households facing double-digit inflation eating into their budgets, household finances are in serious danger of remaining scarred for years or even decades.

But while some short-term damage is almost inevitable, there are steps you can take now to protect your finances for the future.

Here are eight.

1 Keep contributions running

When things are tight, it can be hard to justify saving for a distant future. Indeed, some people may find that they have no choice but to interrupt pension contributions.

But it is vital to think carefully before putting such payments on hold. You will then miss out on free money from your employer and the tax authorities, which would otherwise automatically be added to your pension.

Not paying a premium for even a year can have a significant impact on your wealth when you retire, especially if you are still at the beginning of your career.

Take, for example, a 22-year-old who earns £25,000 and contributes eight per cent annually to his pension. They could have a fund of £393,000 by age 68, according to calculations from investment platform AJ Bell.

But if they delay saving for just a year, their fund could be worth as much as £12,000 less at retirement age. The calculations assume that their income will grow by 2% each year and that their investments will grow by 4% after costs. Anyone with Universal Credit can lose even more.

Someone who cut their contributions by £100 could lose at least £200 from their pension fund and only have an extra £45 to spend, according to leading financial expert and consumer advocate Baroness Ros Altmann.

“When your entitlement is calculated for Universal Credit and means-tested benefits, the impact of retirement contributions is often ignored altogether,” she says. ‘That means that if your income is lower because you pay in your pension, you will receive an extra benefit.’

So far, auto enrollment rates have remained impressively resilient. The percentage of members who automatically enroll and stop saving is just 3.1 percent and is no higher than in the past two years. However, many employees are considering this, according to a recent survey by The Pensions Management Institute.

2 Postpone your state pension if you can

For many, it couldn’t come soon enough to qualify for state pension.

But if you can go without a claim for a while, the income you end up receiving will be more generous.

For every nine weeks that you are deferred, the government will increase your AOW income by one percent. That means someone who qualifies for the full state pension of £185.15 a week can increase their pension by £10.70 if they fall a year behind schedule.

The savings can add up as you retire for a long time. However, this option isn’t for everyone, so do your research first.

3 Drip feed instead of investing large sums

Investing in turbulent markets can be stomach cramps.

To avoid the biggest shocks, invest small amounts regularly instead of lump sums. This way you avoid investing a large amount just before the markets fall, although you also avoid investing your money just before the markets rise. It makes for a smoother investment process.

In the short term, investors are likely to experience a bumpy ride. But markets tend to rise in the long run.

4. Check that your costs are not too high

Of course, if you work hard to save for your retirement, you don’t want your returns to be taken away in the form of fees charged by your investment platform or pension provider.

Unnecessarily paying an extra 1% in fees can cost tens of thousands of pounds in the long run. Take, for example, a £50,000 pot that enjoys a return on investment of five per cent per annum, excluding costs.

With a fee of 1.5 per cent, this fund will be worth around £105,000 after 30 years, according to calculations by AJ Bell.

Beware: paying an extra 1% in fees can cost you tens of thousands of pounds in the long run

But with a cost of just 0.75 per cent, it’s worth an extra £25,000.

Check what benefits you pay for your pension – both current and those you no longer pay. If they are high, consider switching providers.

Savers who deposit money in benefit schemes, also known as final pay schemes, cannot switch. You may also not be able to switch from your current company pension scheme.

5 Wait to withdraw 25% lump sum

When they reach the age of 55, savers can withdraw up to a quarter of their pension from their pot tax-free.

Thousands rush to take it as soon as they qualify, whether they need it or not. But if you don’t have urgent spending plans, it may be worth leaving some or all of it invested.

For example, if you leave a £100,000 pension pot invested until age 66, it could be worth £154,000 – £15,000 more than if you took out 25 per cent at age 55.

6 Be brave…and stay invested

It can be painful to see the value of your pension fall due to market volatility.

It can be tempting to move it to what feels like security, by moving it to a savings account.

But once you sell investments, you’ve locked in those losses. By staying invested, hopefully you’ll have time to recoup those losses in time.

If you find it difficult to avoid the understandable rush to sell, don’t check your portfolio too often. If you have a good strategy for your investments and are saving for the long term, you won’t need to review your portfolio more than every few months unless your circumstances change.

7 Only take out what is really necessary

If you are already drawing your pension, try to only take what you need. Taking money out of your pot when its value has dropped means committing those losses.

First, try to minimize the withdrawal and spending of other pots you have, such as cash. However, as bill costs rise, this is easier said than done.

8. Finally, watch out for scams

Fraudsters thrive in times of fear and uncertainty.

Protect yourself by asking yourself a few questions before making any changes to your pension or investments.

Cold calls about pensions are illegal, so if someone contacts you out of the blue and offers you a service like a ‘pension statement’, it’s probably a scam.

Before transferring a pension, make sure that the person or company you are dealing with is regulated by the Financial Conduct Authority and authorized to provide pension advice.

Don’t rush anything – take the time to research and get a second opinion.