Naz Financial

A Personal Financial Blog from Naz Miller

Can Pension Savers Do Anything to Mitigate Inflation?

Pension savers are rightly concerned. The rate of inflation for April 2022 was 9.0%, using the CPI measure. So, purchasing power for pretty well all of us is diminishing rapidly. Unfortunately, it’s likely to get worse, as utility bills are set to rise even further, later in the year. Also, with no let-up in the war in Ukraine, there’s little prospect of an immediate recovery on the horizon.

For pension savers looking to mitigate the effects of inflation, these are difficult times. The purchasing power of our pension savings is falling and what to do next really depends on your personal circumstances and perspectives.

This article builds on the theme that I set out in June 2021, The Impact of Inflation on Your Savings and Investments.

What follows is not advice; it’s an attempt to show you that there are options out there and that you should really talk to a financial adviser before taking any action right now.

So, with that bit out of the way, let’s look at some general categories of pension savers. I’m concerning myself with:

  • pension savers 10 years or more from retirement;
  • pension savers close to retiring; and
  • those already retired.

For Pension Savers Looking to Retire in 10 Years or More

This group has some flexibility, the pressures are less immediate. Yes, your pension savings could well be diminishing in value right now, but you have the least to fear from inflation. History shows at that there are many economic upturns and downturns. You have time for corrections. Lower prices on shares and bonds now, means regular contributions can at least buy assets for less.

One idea, if you can afford it, is to set your regular savings amounts to be a fixed percentage of your salary, rather than, say, a fixed sum of money. So, if your earnings increase faster, your pension savings can do, too.

Also, ensuring your pension has a diversified mix of assets from different sectors, locations or sources can mitigate the effects of short-term inflation. Talk to your financial adviser about this.


For Those Planning to Retire Sooner

If you’re approaching retirement soon, you’re likely to want to act to ensure you can continue to secure a comfortable retirement, in both the short term and long-term. Especially if you’re 5 years or less away from retirement.

One decision is how you want to receive your retirement income. Broadly there are 2 choices; annuity income or drawdown.

You can buy annuity plans that move with inflation, effectively mitigating the purchasing power impact. Beware, they are expensive, and your annuity will be lower in the early years, maybe too low. Whether inflation-proof or not, annuities offer a degree of income security. However, the value of income paid by standard annuities will fall in real terms, in line with the rate of inflation.

If you take the alternative route of drawdown, whatever remains in the pot, continues to be invested and may recover as the economy recovers. In turbulent times, that may not be as appealing, of course.

In general, the longer you can resist selling invested assets (i.e. drawing your pension), the better chance you’ll have of being able to smooth out the market fluctuations.

Another option might be to defer your retirement if that’s a practical option for you. It may well protect your long-term income by staying with predictable earned income and continuing to invest in the pension.

Also, there’s the possibility of taking on short term, temporary or part-time work to bolster your income through this period of inflation.

For Already-Retired People

Those with existing pensions will need to manage these carefully, particularly given the new inflation. Look at what you actually need to spend. Maybe you can take less now, to bolster the future? Or maybe you have cash reserves that you live off in the short term, to protect your invested assets for longer. Any cash held will be most likely diminishing in value faster than invested funds.

Many arrangements, such as defined benefit schemes, such as company pensions, may have protections against inflation, it’s vital to not give these up.

In Conclusion, for Pension Savers to Mitigate Inflation

There are choices out there for pension savers seeking to mitigate the effects of inflation. Some may be more palatable to you than others. My best advice is to seek advice, from a professional, such as me. Contact me any time, I’m delighted to help where I can.

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Naz Miller

I'm Naz and I'm a Financial Adviser. Prior to working in private practice, I spent 34 years working at Lloyds Bank in Cambridge and surrounding areas. My work has always focused on helping clients achieve their long-term financial objectives.

Glossary of Personal Financial Terms

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