The Scottish Widows 2022 Retirement Report explores how 15 years of stagnating wages and the recent rise in interest rates is affecting the money habits of savers.

Pete Glancy
Head of Policy, Pensions & Investments
29 June 2022
6 min read

The rising cost of living is significantly impacting the nation’s finances. Day-to-day spending, as well as long-term savings habits, have been affected by the increased cost of everyday essentials such as energy, food, housing and petrol. As a result, people are having to make incredibly tough choices on how they spend – and save – their money. At the same time the country continues to face into a retirement income crisis, which could see millions of people financially unprepared for their later years.

What’s causing the current cost of living crisis?

Since the financial crisis in 2008, the UK has experienced an unprecedented period of stagnant real wage growth. Had the trend prior to the financial crisis continued, wages would be 28% higher on average than they are today, meaning that a median earner on £28,000 has lost out on £7,700 in real income. Instead, wages fell in the immediate aftermath of the crisis and only gradually began recovering around 2013.

This year has also seen inflation surge to multi-decade highs and is currently being reported at over 9%, with the price of necessities such as energy, transport and food rising at rates not seen since the financial crisis. Some of this persistent inflation is driven by the lingering impact of the pandemic: government stimulus measures have boosted spending, and there are supply chain disruptions. Energy prices are affected by both the direct impact of the war and the sanctions imposed on Russia, while global food prices also rose to a new all-time high in April as a result of war-related supply disruptions. 

Had the trend prior to the financial crisis continued, wages would be


higher on average than they are today


The impact on retirement savings

So what impact is this going to have on the nation's retirement savings? Well, given the current fiscal landscape it’s going to be difficult to address – and right – the current savings shortfalls. 

Rising living costs present a vast range of different challenges. Some groups, such as renters, are experiencing particularly sharp squeezes on their cost of living. By contrast, wealthier individuals face less immediate pressure, but they don’t avoid the rises entirely – they’re likely to pay a high cost as inflation erodes the value of their cash savings. 

We looked in detail at the impact of the rising cost of living on different societal groups to explore how they’re affected:

The cost of living impact on renters

Renters are, on average, a financially vulnerable group. Before the COVID-19 crisis the Financial Conduct Authority (FCA) found that renters were more than twice as likely to have low financial resilience than the wider population.1

The Scottish Widow survey results show that renters were less likely to have recovered financially from the pandemic: 40% of those renting consider their financial situation as having worsened relative to before COVID-19, compared to 36% for homeowners. And in line with their greater financial vulnerability, 51% of renters said that they were very concerned about making ends meet due to rising costs – significantly more than homeowners (32%). 

Renters also face additional housing cost pressures compared to most homeowners, as higher inflation means that rents continue to rise, while those in fixed-term mortgages are yet to be hit by the increases. Rents have gone up by over 3% in the past year, pushing the median rent up by over £20 a month2 .

"Before the COVID-19, crisis the FCA found that renters were more than twice as likely to have low financial resilience than the wider population."


The cost of living impact on those who are near to – or in – retirement

Those in their early 50s and beyond face a particular set of challenges, including the effect of inflation on their savings. More than 15% of those aged 50 to 59 hold cash, and this rises to 29% for those who are already retired. Higher rates of inflation can diminish the value of that cash, which can lead to significant losses in investment returns over an extended period of time.

Rising costs also present different choices for those nearer to retirement. Anyone over the age of 55 can begin to access their pension savings – and some may choose to do so in order to support their short-term financial resilience. 11% of those in their 50s reported being worried about having to dip into their pension to relieve immediate financial pressures. 

The cost of living impact on wealthier savers

Wealthier savers are not immune to the impact of increased living costs, as the current environment of steep inflation poses a real threat to their retirement plans. High inflation erodes the value of savings for everyone, but the effect is much greater for those who hold more cash. The top 25% wealthiest households in the UK hold on average £54,900 in cash, and the loss in value of those savings over two years is about £6,500, compared to a £2,000 loss for the median household3

High inflation also affects those with Defined Benefit pensions (often in the public sector) who can receive tax penalties for breaching the Annual Allowance. Those in Defined Contribution Pensions (Personal Pensions, Master Trusts and the like) will face tax penalties of up to 55% if their investments keep pace with inflation and their pot breaches their Lifetime Allowance. The current Lifetime Allowance is frozen at £1.073m, but cumulative inflation at 25% since the freeze was put in place means the real value of the allowance will have fallen by over £215,9004.

The cost of living impact on the self-employed 

The self-employed don’t appear to be experiencing more difficulties than other groups. In fact, findings from the retirement report shows that they’re less likely to be worried than the others. 37% of them are very concerned about making ends meet as a result of the rising costs of living, compared to 42% for employees on a permanent contract. However, the share of them cutting back in ways that shows a deterioration in financial resilience is similar (31%) to that of employees (30%), with 15% of each cutting back on essentials.

That said, there remain longstanding inequalities in retirement preparations between employees and the self-employed: more than a third (36%) of the self-employed are saying that they are saving nothing for retirement. This is several times more than the rate for employees (9%) and equivalent to about 1.2 million people5 aged 30-64. 

These differences in pension participation between the self-employed and employed populations are, to a significant degree, driven by automatic enrolment. The auto-enrolment policy has led to a step-change in participation amongst employees, but there has been no equivalent for the self-employed. 


of survey respondents said that the main thing they’ll be cutting back on is essentials

What is the real impact on the rising cost of living?

Cutting back

Unsurprisingly, in response to the crisis many have said that the main expenditures they will cut back on is leisure and holiday spending. However, some are being forced to make decisions that are particularly concerning: 16% have said the main thing they will cut back on is essentials, while for 8% the main thing they will be cutting back on is non-retirement savings, or ‘rainy day funds’.

Reducing pensions contributions

Close to 11% of adults have said they’ve cut back on their pension contributions - or stopped contributing altogether. On average, they reduced their pension savings by around £37 per month, which is equivalent to over £2.5bn in lost contributions to the UK economy as a whole per year6

The reduced value of cash savings

Rapid inflation doesn’t just threaten peoples’ ability to save - it can also severely reduce the value of the savings they already have. Default investment portfolios designed by pension providers will have some level of protection against inflation, but those who hold long-term savings in cash-like or low-risk assets are particularly exposed to inflation. This is worrying given 18% of the survey respondents said they have either already invested or desire to invest the majority of their pension savings in cash, cash-like or similar low-risk assets.

When you consider that those invested in cash might have earned on the order of a 1% return in the best case, the current 9.1% annual inflation rate in May implies a 7.4% loss in real terms in the past year (that is, 1% nominal return less inflation). If inflation forecasts are correct, people could lose a total of 11.9% in two years7

What are we asking for?

Clearly the rising cost of living has had a huge impact on households abilities to save – and threatens to seriously impact on the nations long-term preparedness for retirement. At Lloyds Banking Group, we believe that the UK government needs to prioritise two sets of actions:

  1. Measures which will address the cost of living crisis in the short term, and return the country to real wage growth over the longer term.
  2. As real wage growth returns, commence a process of gradually increasing the statutory level of pension savings from 8% to 12% of income, and encourage those who can afford it to save at least 15%, which we believe is needed to fund a moderate standard of living in retirement.

As we’ve seen in the retirement report, the cost of living rises are affecting various societal groups in different ways. Therefore, these challenges require us to think more broadly and radically about approaching retirement.  

One crucial part of reform must be to automatic enrolment. Current pressures on income mean that any shift towards higher pension contributions is untenable, but it’s also true that current contributions levels aren’t acceptable if we want people to enjoy a comfortable retirement income. To fix this, as wages rise again, so too must pension contributions. Current commitments from the UK government to remove earnings thresholds are a first step, and these must be followed by further increases over the next decade to increase defaults to at least 12%. More must also be done to engage self-employed workers with retirement savings. 

These are first steps, but by the industry and UK government coming together to navigate through the impact on the cost of living on pension savings, we can help to safeguard the UK’s retirement future. 

About the author Pete Glancy

Pete is the Head of Policy, Pensions and Investments at Scottish Widows, part of Lloyds Banking Group's Insurance and Wealth division.

Pete has worked at Lloyds Banking Group for 31 years, holding a wide range of senior positions, including Head of Individual Pension Propositions and Head of Workplace Pension Propositions before taking on the pensions policy brief 6 years ago.

Pete is on the Pensions Panel at the CBI, and the Strategy Council at TISA in addition to numerous industry and trade body working groups

Pete's background Read less
  • References 

    1 Page 14, Financial Lives 2020 Survey, FCA2

    2 Based on rent-specific CPI inflation: Private rental market summary statistics in England - Office for National Statistics ( For £ values we use the median rent in England in the period 1st April 2021 to 31st March 2022 based on private rental market statistics: Private rental market summary statistics in England - Office for National Statistics (

    3 Using April 2018 to March 2020 data (male and female) in Table 5.1 of the ONS financial wealth data for the 75th percentile point and the 50th percentile point (including current accounts in credit, savings accounts, and Cash ISAs): Financial wealth: wealth in Great Britain - Office for National Statistics (

    4 The current value for the allowance has been frozen since the tax year 2020-21. It applied first to earnings from April 2020 i.e. the second calendar quarter. We inflate the frozen figure at the actual CPI inflation between the second quarter in 2020-22, forecast inflation for 2022-25 using the Bank of England May 2022 Monetary Policy Report, and at 2% (inflation target) in 2025-26.

    5 Estimate based on the total number of self-employed in the UK aged 30-64, by the ONS, for the period 2021 January to December: Self employment figures by age band - Office for National Statistics (

    6 We extrapolate from the % share of those who cut back on their pension contributions or stopped contributing entirely, and from the average annual reduction, both based on our survey. We then apply these rates to the UK adult population, available via ONS: Population estimates for the UK, England and Wales, Scotland and Northern Ireland - Office for National Statistics (

    7 Inflation between May 2021 and May 2023 will be c.16%, and returns earned on cash is c.2.5% over two years. Based on forecast inflation rates from the Bank of England Monetary Policy Report published in 2022 May: Monetary Policy Report - May 2022 | Bank of England. Assuming cash interest rates rise to 1.5% next year as some of the Bank of England’s rate rises expected by the market filter through to retail interest rates: UK rate rise expectations pared back after Bank of England warning | Financial Times. We note that index-linked government bonds can compensate for inflation-adjusted losses. Please note that the real return is close but not equal to the nominal return minus inflation due to compounding.


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