You will probably already know that the Office for National Statistics (ONS) revealed that inflation reached 9% in April 2022, the highest level for 40 years.
While that’s disheartening enough, the Guardian reports that food prices rose by 4.5% in May 2022 alone, meaning inflation is unlikely to be falling any time soon.
One reason for the food price hike is a shortage of labour due to Brexit, and another is the escalating price of fertiliser as the Ukraine conflict continues. While you have probably felt the effects of skyrocketing inflation on your pocket, if you’re a pensioner – or approaching retirement – the increased cost of living could carry another risk: your pension running out earlier than expected.
Read on to discover why, and three clever steps you could take to help ensure the longevity of your pension pot. Before you do though, let’s look at what inflation is, and how it affects your finances.
Inflation means you spend more over time to maintain your lifestyle
Inflation is the increasing price of goods and services and can affect everything from your utility bills to your weekly shop. Over time, inflation devalues your money in real terms, as £1 in the future is likely to buy you less than it does today
To demonstrate this, consider the price of an 800g loaf of white bread, which data from the ONS shows averaged 58p in May 2002. In May 2022 the same loaf cost an average of £1.15, meaning the price has doubled.
As you can see, you need to spend much more over the long-term just to maintain your lifestyle. If you’re a pensioner and your retirement fund is not keeping pace with inflation, this could put your financial security in jeopardy. Here’s why.
Your pension could run out 20 years earlier than expected
Put simply, taking more money from your pension to keep pace with inflation increases the chances of it running out. As a result, you may need to significantly reduce your standard of living to make ends meet.
According to the Telegraph, if you have a £100,000 pension and took £5,000 a year in income on top of your State Pension, your pot is likely to run out after 37 years at an average inflation rate of 0%.
If, on the other hand, inflation remained at an average of 7% and you took the same amount of income in real terms every year, the pot would run out at around 15 years – 22 years earlier.
The good news is that you might be able to extend your pension’s longevity, so let’s look at three ways you could do this.
1. Continue to work
Instead of increasing your pension income, you may want to consider returning to work or continuing working if you’re approaching retirement. This could help you maintain your lifestyle without potentially depleting your pension pot.
Furthermore, you could also boost your pension, which might mean you can maintain a better standard of living for longer. If you do this though, you need to be careful of the Money Purchase Annual Allowance (MPAA).
If triggered, it could significantly reduce the amount of tax relief your pension contributions receive. This could leave you with an unexpected Income Tax liability and reduce the potential growth of your retirement fund.
2. Consider investing
While you should always have an adequate emergency fund to ensure that you can cope with life’s unwanted surprises, having too much cash in savings could be detrimental to your wealth. This is because savings accounts could offer rates that are significantly lower than inflation.
According to Moneyfacts, on 14 June, the best easy access savings account offered 1.52% interest, and the top five year fixed-rate offered 3%. This means your money is unlikely to keep pace with inflation, which could reduce its value in real terms.
If you’re using cash savings as part of your retirement strategy, this could jeopardise your long-term financial security. The good news is that you may be able to inflation-proof your money by investing it, which could expose your cash to greater growth potential.
In 2019, the Barclays Equity Gilt Study revealed that the stock market outperformed cash in 91% of 10-year periods between 1899 and 2019. The study tracked the nominal performance of £100 invested in cash, bonds or equities between these dates.
Always remember that past performance is not a reliable indicator of future performance.
3. Live off other assets
Rather than increasing the amount you take from your pension pot, you might want to consider using income from other assets if you have them. For example, if you withdraw money from an ISA, it could provide an income that’s free of tax while preserving the value and longevity of your retirement fund.
A financial planner can confirm whether this might be the right strategy for you.
Get in touch
If you would like to discuss how inflation might affect your retirement fund and ways you might be able to inflation-proof your pension pot, contact us on hello@ardentuk.com or call 01904 655 330.
As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can have peace of mind that you will receive excellent advice and the highest quality service.
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.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.
