Will your pension weather the inflation storm?

INFLATION It attacks your finances on many fronts, and that’s particularly true of the money you need for retirement.

Inflation makes it potentially harder to save in the first place, harder to grow your retirement fund through investment returns, and then reduces the value of whatever you’ve managed to set aside.

But it’s not all bad news: Some elements of the retirement system improve as prices rise, while many of the negative effects can be mitigated, or at least planned for.

Here’s how inflation will affect your retirement plans and how to deal with it.

If you’re still saving

If you still have a long time until retirement (10 years or more), the current bout of inflation and market turbulence is certainly a concern, but it may actually end up helping you in the long run.

The obvious problem with this is that you may be left with less money at the end of each month to save due to higher costs for essentials like energy and food. The next few months are going to be tough and the first priority should be to cover the basic costs of living first, even if it means giving up pension savings for a while.

But if you can help it, maintaining pension savings makes sense and could even pay off in the future. One of the side effects of the current economic turbulence has been the fall in stock and bond prices. Long-term investment success depends on buying low and selling high. That means buying when markets are down and risk appetite is low, like right now: It’s the investments made at times like these that have the potential to boost your long-term pension yield.

Trying to manage investments between different providers can be time consuming and difficult. Moving them to Fidelity could make this easier and help your money work harder. You can find out more about how you can take more control of your pensions by pooling them here, as well as our latest cash back offer where you can get £100 to £1,500 back when you transfer your pensions, ISAs or other accounts to us. investment accounts. before October 6, 2022. Exclusions and terms and conditions apply.

If you plan to live on investments

If retirement is part of your plan in the next few years, it’s critical to reevaluate your retirement options to make sure they’re on track, taking into account the higher cost of living.

Deciding exactly how you plan to earn your retirement income is important: you can read more about your options here – because, ideally, your plans should allow you to cover the cost of essential expenses with income that can grow as prices rise. That could mean using some or all of your pension fund to buy an annuity that offers some protection against inflation, or leaving the pension money invested through drawdown and then earning income that can grow in the future. according to inflation.

When developing plans for their clients, financial advisors will try to recommend an investment withdrawal rate that leaves enough room for income to grow in cash terms over time as a way to keep pace with prices.

A rule of thumb that investors have commonly used is the 4% withdrawal rate. It is an assumption, based on historical returns, that investors can take 4% of their pot in the first year of withdrawals, and then improve it in line with inflation, and still trust their money to last 30 years.

That may need reassessment with prices increasing 10% year-over-year as they currently are, but it’s a major push to build something inflation-proof into your retirement plans.

If you plan to buy an annuity

Annuities are a financial product that takes your pension savings and provides you with a guaranteed income in return. You can use some or all of your pension fund to purchase an annuity, and the income rate you pay will depend on the market rate that is offered at the time.

Recently, in one of the rare victories of inflation and rising interest rates, those rates have been improving. According to figures from sharingpensions.co.uk, a 65-year-old could currently use £100,000 of pension savings to buy an annuity paying £6,283 a year.

Compare that to rates being offered in early 2021, when the same product would pay just £4,786 a year. That’s a 31% increase in income from exactly the same amount of pension savings.

Keep in mind that annuities that pay an income that increases with inflation pay a lower initial income, but may be worth mitigating against higher prices in the future.

If you hope to get a State Pension

The latest official inflation data will be released next week and another reading above 10% is expected. That will be news in itself, but the September inflation number is of greater importance because the government uses it to determine annual increases in all types of payments, especially the State Pension.

In her leadership campaign, Liz Truss pledged to reintroduce the ‘Triple Lock’ for state pension increases. This is the rule that ensures that the payment automatically increases based on the largest of three possible metrics: the rate of inflation; the rate of salary increases; or 2.5%.

Right now, inflation is by far the highest of all, and an increase to that level is justified because retirees include some of the most financially vulnerable people in society, and many will struggle to cover the costs of heating and food bills. Already.

In cash terms, a 10% increase would take the state pension (which applies to anyone who started claiming after 2016) from £185.15 to £203.66 per week. It would also take the annual income from a full state pension to £10,590.32, the first time the payment has been worth more than £10,000 per year.

The government’s Pension Wise service offers free, unbiased guidance to help you understand your options in retirement. You can access the guide online at www.moneyhelper.org.uk or by phone at 0800 138 3944.

Fidelity Retirement Service also has a team of specialists who can provide free guidance to help you with your decisions. They can also give you advice and help you select products, although this will come at a cost.

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