How could inflation affect your pension and retirement?

Inflation is a key risk to your pension fund and subsequent income once you reach retirement that you may not have fully considered.

What is inflation?

In 1982, you could a loaf of bread, eggs and a pint of beer for under £2*. Nowadays this will cost you closer to £10. Inflation is the rising cost of living and it can significantly affect your income at retirement.

Inflation risk

Inflation is a risk that will be present throughout your retirement. Inflation will gradually reduce the buying power of your assets and your retirement investment’s capital value.

Once you have retired, there are a limited number of options that can help you to address inflation risk. This means it is important to plan ahead.

Find out more about retirement planning

When deciding how to create an income from your retirement savings, you should consider the impacts of inflation. You need to factor in that you will need more money each year to keep your income in line with inflation.

You also need to consider that when you are in retirement you are likely to want to take less risk with your investments than you did when you were working and building your pension pot. This means that you are likely to change your underlying pension investments to low risk options which will have less potential to grow.

How will inflation affect my lump sum withdrawal?

If you are considering withdrawing your 25% tax-free lump sum from your pension, you should consider what you are going to do with this money. Interest rates are currently at historic lows which means that if you put this lump sum into a bank account and keep it there for some time, your savings would reduce in value.

Review your pension income

When you are retired, you should review your income requirements at least annually to make sure that you are not taking more income than you need. If you are, you can reduce or even temporarily stop your monthly withdrawal amounts and leave more invested to hopefully grow in value over time.

At Four Wealth Management, all our clients are offered an annual review meeting to discuss their investments and pension to check that their needs are being met. If your circumstances change at all, your adviser will adjust your investments accordingly to keep them in line with your personal goals.

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Is the State Pension protected from inflation?

The State Pension is a source of inflation-proof income. The State Pension is protected by the government’s ‘triple lock’ which means the State Pension will increase by whichever is highest out of price inflation, earnings growth or 2.5%.

In 2021 the State Pension will rise by 2.5% as earnings growth was at -1% due to redundancies caused by the Covid-19 pandemic. Price increases were at 0.5%**.

How can I keep my pension income safe from inflation?

You can turn your pension pot into guaranteed income for the rest of your life by using part or all of your pension pot to buy an annuity.

One of the options when choosing your annuity is that you can choose for your income to increase with the rate of inflation each year. Please note that once set up, an annuity cannot usually be changed or cancelled so it is important that you consider all your options carefully.

It is important to note that an annuity may give you significantly less income than you could receive by using pension drawdown. At Four Wealth Management, a Financial Adviser will explain all your options and recommend which is best for your individual circumstances.

Book a no-obligation meeting to discuss your retirement options

Start retirement planning today

To discuss your options and to create a strategy for reducing the risk of inflation on your retirement income, call Four Wealth Management on 0117 973 0500 or leave us a message online to book a no-obligation meeting with a financial adviser.

Book a no-obligation meeting today

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested. An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

*Lloyds TSB Private Banking, 2013

**Which, 2020, ‘State pension to rise by up to £229 in 2021 thanks to the triple lock guarantee’

Four Wealth Management Ltd is an Appointed Representative of and represents only St. James’s Place Wealth Management (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website at