3 positive ways to stop soaring inflation jeopardising your retirement

If you remember Top of the Pops, Duran Duran and roller skates, you may also remember the last time inflation in Britain hit double figures back in the 1980s. Yet 40 years of single-digit inflation rates came to an end when the Office for National Statistics revealed inflation hit 10.1% in July 2022.

If that isn’t bad enough, according to the BBC, experts have warned that inflation could reach 18% in 2023. According to pension provider Standard Life, which questioned more than 2,500 customers, 93% said they were feeling the impact of increasing costs and soaring fuel prices.

This could be particularly significant if you’re retired or about to retire, as higher inflation could jeopardise your long-term financial security as your pension pot may run dry earlier than expected.

So, if you’re asking yourself: “how can I ensure inflation does not ruin my retirement?”, read on to discover more. But before you do, we need to consider what “inflation” is.

Inflation reduces your money’s real terms value over time

In short, inflation is the rising cost of living over time. It means that £100 today is likely to buy you more than it will in the future.

If you use an inflation calculator, you will see that you would need £197 in August 2022 to have the same spending power as £100 in August 2002. This means your money would have to increase in value by 96.5% during the period to keep pace with inflation, which averaged 3.4% over the two decades.

This is significantly below the 10.1% inflation rate for July.

Another risk with inflation is that, as prices rocket, you have to spend more just to maintain your standard of living. According to a study by Canada Life this is already happening, with 55% of UK adults saying they are looking to increase their income to deal with the cost of living crisis.

This is something that could have dire implications for pensioners, which we will look at next.

You may take more from your pension to maintain your lifestyle

As the cost of living rises and you take a higher level of income from your pension pot to maintain your standard of living, you could be at risk of depleting your retirement fund more quickly.

To demonstrate this, you may want to consider the following illustration, which was featured in a Telegraph article.

It shows that if your pension is £100,000 and you took £5,000 a year in income on top of your State Pension, your pot is likely to run out after 37 years if inflation averages 0% during the period. If inflation averaged 7% and you took the same amount of income in real terms every year, the pot would run out at around 15 years – that’s 22 years earlier!

Bear in mind also that inflation is currently even higher than the 7% assumed in this article, so you could deplete your fund even more quickly. All that said, there are ways you may be able to extend your pension’s longevity. Let’s consider three:

1. Reassess your income needs

Reviewing how your expenses have changed over the last year could help you create a realistic budget, especially if you look closely at the outgoings that have increased the most in price. This could help reduce the amount you need to take from your pension pot, which in turn could stop you from taking too much now.

This could help preserve the value of your pension pot over the long term.

2. Assess your pension’s investment performance

If you have a defined benefit (DC) pension and take an income using flexi-access drawdown, the rest of your pension pot will typically remain invested. You may want to look at how the investments within your pension pot are performing, as greater growth could help inflation-proof your retirement fund.

A financial planner can confirm the performance of your pension’s investments, and what your options might be. They will also explain the risks associated with changing your investments.

3. Consider investing your cash

If your cash savings are part of your retirement strategy, you may want to consider the long-term effects of keeping it in savings accounts.

While the Bank of England has increased its base rate to 1.75%, Moneyfacts reveals that the top easy access savings account offers 1.86% (25 August 2022), significantly below July’s inflation rate of 10.1%.

One way you could inflation-proof your money is to consider investing it, as it may provide greater growth potential over the long term. According to research by Schroders, between the start of 1952 and the end of May 2022, UK equities returned 11.7% a year on average despite significant downturns during the period.

Cash returned an average of 6% a year.

That said, always remember that 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.

Get in touch

As this is not a complete list of the actions you could take to extend the longevity of your pension, please contact me if you are asking yourself: “how can I inflation-proof my pension?”.

You can email me on a.douglass@grosvenorconsultancy.co.uk or telephone me on 01793 766 123. I’d be very happy to help. Alternatively, call my mobile on 07525 177 046.

Please note that while I offer high standards of service and ensure any solution I recommend is right for you, I’m also a busy mum, so work Mondays and Tuesdays only.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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