3 compelling reasons to factor inflation into your retirement planning

Category: News

As inflation hits a 40-year high, a new report, published by MoneyAge, finds that only 4 in 10 (37%) of over-55s are factoring inflation into their retirement planning.

If you are approaching, or in retirement, you might soon face an “inflation shock” as the spending power of your pension fund diminishes.

Keep reading to find out how to inflation-proof your retirement plans, and why it’s vital that you do.

Inflation lessens the spending power of your money

The Office for National Statistics recently confirmed that inflation for the 12 months to May stands at 9.1%. This figure marks a new 40-year high.

Simply put, a year ago £100 would have bought you £100 of goods or services. Today, it would buy you just £91 worth.

Global economies already struggling to recover from the coronavirus pandemic have been hit with supply chain issues, staff shortages, rising fuel costs and, more recently, Russia’s invasion of Ukraine.

Inflation is now predicted to peak at around 11%.

But what does this mean for your pension, and how can you mitigate the effects of a rising cost of living?

3 ways to inflation-proof your pension wealth

1. Factor inflation into your retirement planning

While inflation might be high currently, the idea of rising costs isn’t new. We all accept that the value of commodities increases over time.

We’ve already looked at the effect of inflation on £100 over the course of a single year, but your retirement could last 30 to 40 years or more. Inflation’s influence on your pension pot over decades will be much more pronounced.

Consider a retirement income of £30,000 a year, starting in 2022.

Source: CPI inflation calculator

Even with inflation at the Bank of England’s 2% target, the buying power of your £30,000 a year will be equivalent to £54,340 in 2052, 30 years into your retirement.

At Globe, we can help you factor inflation into your retirement calculations. This helps to ensure that you can live the lifestyle you want, for the whole of your retirement.

2. Consider a rising annuity

Some of your retirement income is already inflation-proofed. The State Pension, for example, already rises each year in line with the highest of inflation, average earnings growth, or 2.5%. This is known as the “triple lock”.

But you can opt for a similar approach when taking your private or workplace pension benefits too.

An annuity pays a regular income for the rest of your life, on a frequency of your choice. You can choose an annuity that continues to pay to your spouse on death, as well as one that rises each year specifically to combat inflation.

Once started, you can’t usually amend or cancel an annuity, so be sure to speak to us before you choose this option. Also, note that an escalating annuity is more expensive, so your starting amounts will be lower than if you took a level income.

3. Weigh up the risks of keeping part of your fund invested

Another, albeit riskier option, is to take flexi-access drawdown. With this option, you make withdrawals from your pension pot as and when you need them, while the remainder of your money stays invested.

This means your pension still has the potential for investment growth, but as with any investment, there is risk attached. Your pot value can fall as well as rise.

You’ll need to budget carefully to ensure that you don’t run out of money, so planning for a lengthy retirement is key.

Also, be sure to only withdraw what you need.

During periods of high inflation, and with interest rates low, keeping too much of your wealth in cash could be a bad idea. While inflation currently stands at 9%, the best instant access savings account rate (according to Moneyfacts as of 17 June 2022) is just 1.52%.

When you withdraw more money than you need, you’ll likely keep excess funds in the bank, where your money will be effectively losing value in real terms.

Get in touch

At Globe IFA, we can take a holistic look at your finances, helping you to live your dream retirement, whatever happens in the wider economy.

Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.