5 ways to protect your pension income against inflation

Laura Miller

by , Freelance financial journalist

at PensionBee

23 May 2022 /  

May 2022

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Living on a fixed income, like a pension, when inflation is high can be challenging. Everything is costing more but the money you have coming in each month is often the same.

Inflation has just hit 9% as of November 2021, a 40-year high. This means that the cost of the things we buy every day, from milk to a Mars bar, is getting more expensive, faster than it did the last time inflation soared, way back in the 1970s.

This may mean your pension pot doesn’t last as long as you thought it would. Or you may not be able to achieve the standard of living in retirement you thought, or hoped, you’d have.

During periods of economic uencertainty, it’s a good idea to look again at your retirement plan, and consider if you need to make any adjustments.

Here are five good ways to protect your pension income from increases in the cost of living.

1. Retire later

Waiting a bit longer than you planned to retire can mean you avoid retiring at a time of high inflation. This can protect your pension pot from the negative impact inflation has on stock markets. High inflation can upset stock markets and may make the value of your pension investments fall.

Withdrawing money from your pension while stock markets are falling can leave you much worse off than taking a pension income when markets are less volatile. This is because, when you sell investments in a falling market to give you an income as cash, it runs down your pension pot faster.

No one can know for sure when inflation will fall again. But waiting a few more years before retiring and dra

2. Use up cash ISAs first

If you have alternative pots of money to draw on, like cash ISAs, for example, they can act as a good backup source of income. Drawing on your cash ISAs for your retirement income for a short while, instead of your pension, allows time for the stock markets to grow again and creates an opportunity for your invested retirement pot time to recover at the same time.

Inflation slowly erodes the value of money, such as cash savings left in the bank, which means its buying power is reduced. If you want or need to still draw down from your pension, just taking income from certain investments, such as bond payments and dividends, can help slow the negative impact of withdrawing money by selling investments while they are falling in value.

3. Withdraw less

Reducing how much you withdraw from your pension may sound strange in a cost of living crisis. But doing so can help your pension grow in the long run. Withdrawing less from a pension each month means keeping more of it invested. This gives it a better chance to grow more than the rate of inflation, keeping your savings growing at a similar rate to the cost of living.

Traditionally, people entering retirement have been told to take around 4% of their total pot a year in income. But during times of high inflation, and especially for smaller pots, it may be beneficial to reduce this.

Remember you don’t need to take the same amount each month. If some months you need to withdraw higher amounts, it can be worth considering taking less in other months, to balance it out.

4. Stay invested – but look at where

It’s important not to panic if you see the value of your pension investments falling. Markets normally go up and down over the months and years.Typically the worst thing you can do is to sell out of your investments when markets are falling. And even if you did, and left the money in cash instead, high inflation would quickly reduce its buying power. But now can be a good time to see where you are invested.

It’s usual for people to move their investments into less risky assets as they approach retirement, thinking this will keep their pot safe. But people are living longer. To make a pension pot last longer throughout perhaps a 30 year retirement, it needs to stay invested in assets that are more likely to increase in value.

Do you have enough of your pot in higher risk assets that will typically increase in value, like company shares and investment funds? Is too much of your pension pot invested in cash-like assets that will have a hard time making you money during periods of high inflation, such as government bonds? Are there better, low-risk alternatives?

Diversification that is right for your life stage is key.

5. Add to your pension

Falling stock markets are not all bad news. Many investors see this as an opportunity to buy more assets at lower prices. If you are able to, it can be worth considering whether now is a good time to top up your pension pot, to give you more later on, or to make your pot last longer.

However, there are tax implications if you have already begun drawing on your pension. Read the government guidance.

Laura Miller is a freelance financial journalist.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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