Inflation and pensions

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Over recent months, we’ve seen inflation rates hit a 40-year high with many people feeling the impact of rising costs.


Understandably, we have spoken to many of our clients about rising inflation and the impact on their pensions and investments. In the following blog, our Advisers have compiled and answered your most asked questions on inflation and your pensions.

What is inflation?

Firstly, we should explain what inflation means and how it is calculated. Inflation is the rate at which prices increase. Increased prices lead to decreased purchasing power which can be measured by how much a ‘basket’ of groceries costs over a period of time.  


Every month, the Office for National Statistics calculates the price of a ‘basket’ of 700 everyday goods and services. This basket value then equates to the overall price level in the UK, known as the Consumer Price Index. To calculate the current rate of inflation, current prices are compared with the prices of a year ago with the difference in price being the rate of inflation.


What makes today’s world different is that the rate of inflation is at over 9%* and the Bank of England’s target inflation rate is just 2%. The Bank of England has said however that ‘current high rates of inflation are not likely to last’. So, we are expecting some challenges in the short to medium term but over the long-term, things are expected to return to a more normal state.


Will inflation affect my retirement plan?

In short, yes, but this is nothing new or to worry about. Anyone who is financially planning must factor in inflation. Today, £1 has a decreased purchasing power that it did 10 years ago, meaning you could buy a lot more for your £1 in the past than today. This is perfectly normal.


In the short to medium-term, increasing prices may impact your ability to save. Those who will be greatest impacted by this will be lower rate taxpayers. With expenditure increasing, most will look at cost cutting measures to tackle this. Some will look to reduce their savings into pensions and ISAs to reduce expenditure. At Reeves we would recommend you prioritise looking at areas which can be cut.


The impact on your retirement plan however is not as high as you might expect. Historically, inflation figures average out over the long term and stick close to the 2% target for inflation. We would suggest that for inflation to be an average of 3% over a 30 year retirement plan, for example, there would need to be 3 or 4 years of high inflation now which is not predicted by the Bank of England.


So what does rising inflation mean for your retirement?


If you’re already retired:

As the cost-of-living increases, this will place a greater strain on your retirement income. The same income will not be able to buy as much as it could before. This ultimately means that pensioners face a choice: cut back on their spending (if that’s possible) or start to draw a higher pension income.


If people do decide to start drawing a higher pension income, it could mean that their savings/investments are diminished faster than planned.


If you’re approaching retirement:

When forecasting for retirement, it will become necessary to account for the effect of inflation if you aren’t already.


This could mean that you need to retire later, draw less or save more in order to achieve your goals. The earlier you start planning, the easier it will be to adjust to changing markets. To assess your current financial situation and your retirement goals, we recommend a pension review with your Financial Adviser.


How can you mitigate rising inflation rates?

There are a few areas to assess in terms of reviewing your expenditure, our Advisers have outlined the following:


  • Check your bank account and cancel unnecessary subscriptions.

  • Review long standing bills to switch and get a better deal.

  • Cook at home.

  • Sell unwanted items.

  • Refinance loans for a better interest rate, if possible.

  • Review your insurance policies with Reeves to see if you are on the most relevant policy and for the best price.

  • Review high cost expenditure and see if this can be cut in any way – i.e. car, review electricity use.


What inflation rate does Reeves use for retirement planning?

Reeves has kept the inflation rate at 2% this year for financial forecasting. We have adjusted other parts of the financial planning tools we use to ensure our plans continue to be a conservative/cautious representation of what we feel retirement reality might look like.


We then carry out stress testing that tells us how likely the retirement plan is to be achievable/unachievable. Discussing this is important and information on its own is often not helpful.


What is causing inflation to rise?

The ongoing Russian issue is the main contributor to rising costs but other factors including sharp price rises in energy, food, fuel and other services have also led to the 40-year high inflation rate.


When will inflation rates decrease?

Unfortunately, we don’t know for certain. However there have been promising signs that inflation may not reach the forecasted heights forecast as fast a predicted.


Inflation was forecast to reach 14% in 2022 and to reach 18% in 2023. However, with Liz Truss vowing to support with rising energy prices and prices already falling since the invasion of Ukraine we may not reach this peak, at least not as quickly as predicted.

Who can help me answer my inflation questions?

Your Financial Adviser can support you with any queries regarding your pensions, investments and inflation. As always, if you have any concerns or questions, please don’t hesitate to get in touch.

This article is for information only and should not be seen as advice or a recommendation to take action. Investments can go down as well as up and you may not get back the original capital invested. Please note: The Financial Conduct Authority does not regulate advice on commercial mortgages, some buy to let mortgages and matters of taxation including inheritance tax planning.


Important information

Pensions are a long term commitment, you may not be able to access your pension funds until the age of 55 (currently), investments can go down as well as up and you might not get back your initial capital. Pension and tax legislation does and can change in the future which could impact your pension.

The value of your investment and any income from it could fall or rise, and you may not get ack the full amount you invest.

Past performance is not a reliable indicator of future results. We always recommend you talk to a qualified financial adviser before making any investment decisions.