20 July 2022
With the UK CPI rate confirmed at 9.4% this morning, pension savers should not feel immune from the risks of high inflation, which could significantly derail retirement plans, according to Ian Browne, pensions expert at Quilter.
Inflation is now closing in on double figures and the Bank of England do not expect the rate of CPI to return to 2% until 2023, if not longer.
The Bank of England expect the CPI rate to peak at 11% in the autumn but with the unpredictable nature of the war in Ukraine and continued energy price hikes it could climb higher than that.
“Inflation can have a devasting impact on a retirement pot and could seriously change your retirement plans at very short notice. However, it is often the forgotten risk that can hide in plain sight. With inflation soaring, people will start to see a significant impact on their spending power,” Browne said.
He adds: “If inflation remains around 10%, your purchasing power is very quickly eroded if your money is held in cash. With interest rates and savings accounts currently failing consumers, retirees are at increased risk from inflation. So, while the state pension will, at the very least, keep up with inflation through the triple lock, your private savings will not unless you do something about it.”
However, Browne believes it is not too late to prepare for an environment of increasing inflation and says it is crucial people take action now. Below he outlines five ways you can inflation-proof your portfolio.
Get your investments right
“If you have a long-term time horizon then you want to be considering if your attitude to risk is high enough. Equities give you the best opportunity to outperform inflation over the long-term and have been shown to outperform every other asset class over the long-term. Review the investments your pensions are in and if you have a time horizon of ten years or more, check you haven’t been invested in a pension scheme’s default fund. Often these will have a mix of assets that may not be appropriate for the amount of risk you may be able to take.
“As you reach retirement, consider keeping money invested in the stock market for as long as possible. This is a higher risk option, but with ‘safer’ asset classes offering little to no income it might be sensible to keep the money invested and rely on a cash buffer to cover your daily outgoings.”
Don’t sit on cash
“The amount of excess savings that have been built up during the pandemic is staggering. But with cash providing little to no real return, having too much could have a significant drag on your retirement plans. We all need a level of cash for day to day spending and emergencies but having more than that will cause problems with inflation. Cash is no longer the king it once was for retirees.”
Consider an annuity
“It used to be that when you started retirement you would cash in your pension pot and buy an annuity. The popularity of these products has since plummeted with the advent of pension freedoms and with rock bottom interest rates, they are unlikely to provide value for money unless you live to a very old age. However, if you want the security of a guaranteed income, with an inflation link, then they are definitely worth considering to give you that peace of mind. It’s never too late to buy an annuity so it’s always worth checking the latest deals throughout your retirement. The older you are or if your health has deteriorated, the better the deal could be. You should remember, though, that once you buy an annuity there is no going back.”
Delay retirement
“If you are able to then you might want to consider delaying touching your pension, particularly if you have other sources of income or wealth. Salaries tend to rise in line with inflation, so this will give you an opportunity to continue to contribute to your pension, take advantage of the tax relief available and invest it to give you above inflation returns depending on your time horizon. Furthermore, as you reach the later stages of working life, spending on things such as mortgages begin to decline, so make use of any additional savings by stashing it away in a pension. It is effectively the best savings account on the market for the over 50s and should be the last savings you should withdraw from.”
Get financial advice
“Inflation is a difficult beast to tame and may take multiple approaches to ensure you don’t run out of money in retirement. Getting professional financial advice is the best way to ensure you have a plan in retirement and that inflation is taken into account. Without it you risk running the gauntlet and trying to manage the risk on your own.”
