There has been good news and bad news for anyone planning their retirement.
The good news is that state pensions are set to increase by £5.55 a week.
The bad news is that both state and private pensions could fall short of what pensioners expect and need, because of inflation.
Inflation has always been an issue when it comes to retirement planning, but the surge in inflation after the lockdown has made urgent action essential.
At Continuum we are looking at just what inflation could do to your pension – and why you need to look at your plans again.
The effects of inflation
Inflation means complications for most types of financial planning but particularly for anyone looking at a pension.
If you are a pension saver, you probably have a target for your pension pot. For example, you may have worked out that you need a pension pot of £500,000 to deliver the income you want in retirement.
Inflation means that the buying power of that pension pot and the income from it will steadily fall. If it stays at its current level of just over 5%, you would need £525,000 to provide the same buying power in a year’s time. The amount you would need goes on increasing as the buying power of cash keeps falling.
The pension income that seems lavish when you retire can be painfully small twenty years later.
Looking at your pension plans
Fortunately, it is possible to factor inflation into your pension plans and still aim to enjoy the kind of comfortable retirement you want.
If you are building your pension pot: Your pension is an investment and the more you put in the more it may grow. There is a current lifetime limit of £1,073,100 for tax-free pension savings. It may be relatively easy to reach if you have a decade or two for your savings to grow through careful investment.
Don’t forget that pension contributions are an excellent investment, because the taxman will actually help you. As a basic rate taxpayer it costs just £8 to put £10 into your pension – a higher rate tax payer will benefit from additional tax relief through self assessment.
Having your contributions invested on your behalf by a fund manager might mean that you don’t need to worry too much about inflation. Beating inflation is one of their key considerations, as well as providing overall growth.
However, there’s no guarantee that they’ll always be able to meet their objectives. It might be time to check that your fund is delivering the growth you need.
If you have taken charge of your pension investments yourself, as you would with a Self Invested Personal Pension (SIPP) for example, it’s definitely worth checking that the rate of return is adequate. If your investments are not keeping up with inflation, the value will get eroded.
If you are ready to start drawing your pension: You need your pension pot to work as hard as possible for you. If you have a defined benefit pension things will be simpler because the amount you get is usually increased each year which may be linked to inflation, but most people no longer have this type of pension.
The UK state pension may also increase in line with the Consumer Price Index (CPI), increasing average wages or 2.5% which ever is the highest
If you have a defined contribution pension, or a pension pot made up of investments, you need to look at solutions for inflation in the years to come.
If you are planning on using drawdown*, where you take enough to live on from your pension pot and leave the rest invested, you must be sure that the amount you’re drawing is sustainable in the long run and that the remainder is invested where it has the potential to grow to keep pace with or beat inflation.
You need to be certain that your pension will last you the rest of your retirement, which could easily be 30 years long – and be enough to pay for care, if you should need it,
One way to be certain of this is to arrange an annuity – where you use your pension pot to buy an income for life from an insurance company. Most annuities are fixed, which means that you are faced with a pension that buys less and less as years go by – but it may be possible to arrange an index linked annuity which will increase in line with inflation.
Getting the help you need
At Continuum we have the answers you need to your pension questions – including answers to inflation. Whether you need to get your pension savings growing faster or want better ways to use the pot you already have, our expertise can work for you – and let you look forward to a retirement without inflation worries.
Start your fresh look at your pension today by calling us.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy, you should seek independent financial advice before embarking on any course of action.
*Accessing pension benefits early may impact on the level of retirement income and may affect your entitlement to certain means tested benefits.
The value of investments can fall as well as rise and you may get back less than you invested.