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Surging inflation is eating up our retirement pensions

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Rocketing inflation – which is now almost at a 40-year high – is a huge concern for those who have already, or are soon-to-be, retired.

s many of those in retirement have a set – and often small – pension to get by on, making ends meet can be a huge challenge when prices are soaring on so many fronts. The situation is even more dire for those without a  private pension. “If you have no private pension and are reliant on the State pension, any increase in the State pension is not keeping pace with inflation or likely to do so in the future,” said Peter Griffin, director of APT Workplace Pensions. “So other than cutting back, there’s very little you can do.”

So if you’re just  about to retire – or are set to retire in a few years – what can you do to protect your pension from soaring  inflation?

Stay invested 

“You could have another 20 years or more to live if you retire at the age of 65,” said Brian O’Reilly, head of investment strategy with Mediolanum Asset Management. “So consider staying invested into retirement.”

You can stay invested in retirement by putting the money in your pension pot into an Approved Retirement Fund (ARF – a  personal retirement fund).

Be careful with how you invest your money in retirement however.

“The old advice was that people lock everything into cash or fixed income investments  (such as bonds) when they retire but that old advice needs to be adjusted as it was based on people living much shorter lives than they do today,” said O’Reilly. “Your risk profile diminishes the older you get as you have less time to recover from market falls – but 20 years is a sufficiently long enough period of time for markets to fall and recover.”

Locking the money in your pension pot into cash or bonds for twenty years would likely see a good chunk of that money eroded over time as returns could well be consistently low or even zero or negative – and so  there’s a good chance inflation could wipe out any returns.   

Avoid bonds

Bonds typically don’t do well when inflation is high and interest rates start to rise. “There are probably a lot of people looking at losses in their bond portfolios or pensions and this may come as a nasty surprise,” said O’Reilly. “This is by far the worst bond bear market we have seen in the last fifty years.”

(A bear market is where the prices of certain investments fall for a prolonged period.)

One option for conservative investors who wish to stick with bonds is inflation-linked bonds as these can offer some protection against inflation, according to O’Reilly.

Go for a multi-asset fund

A good multi-asset fund is an option for a relatively conservative investor who wants exposure to investments which will keep pace with, or even beat, inflation – but who doesn’t wish to take on too much  risk, according to O’Reilly.

Multi-asset funds invest in a range of different investments – such as equities, bonds, property and commodities. This exposure to various investments should reduce the investment risk you take on and boost your chances of making an investment return.

“Multi-asset funds are an area for people to explore if they find themselves with negative returns [on bonds or other investments],” said O’Reilly. “Nominal assets – such as property, equities and commodities –  typically keep pace with inflation. You can invest in a combination of nominal assets through a multi-asset fund. Commodities are important at the moment – energy companies are doing very well so from an investor’s perspective, they’re offering some protection against inflation. A good multi-asset fund will provide exposure to a combination of all these things – as well as to  long-term themes.”

Understand exactly what a multi-asset fund is investing in before pouring your money into one – so that you get the exact investment exposure you want. Be sure too to choose a multi-asset fund which  suits your  risk profile (whether that be a high, medium or low risk-taker) as well as your stage in retirement.    

The further you move through retirement, the more you should be moving towards lower-risk  funds.

ARF rather than annuity 

When you retire, you typically have the choice between taking an annuity or reinvesting the money in your pension pot into an ARF.

An annuity is a pension which can be bought with the money in your pension pot when you retire. Although annuities give a guaranteed income for the rest of your life, many people are shocked at the tiny pension that an annuity buys.

It is possible to buy an index-linked annuity – where the value of your pension increases each year – to help offset any future inflation. However index-linked annuities are very expensive. You could have to wait ten or more years into retirement before you start to reap the benefits of an index-linked annuity.

“Unless you are sure you will live a long time, an index-linked annuity may not be worth it,” said Griffin. 

You may have a better chance of shielding your pension from inflation in retirement should you opt for an ARF instead of an annuity – though this will very much depend on the investment performance of your ARF. In the event that your ARF performs poorly and loses money in a given year, inflation will eat into that fund more than if the investment performance had been strong.

You can withdraw money from your ARF regularly to give yourself an income when you retire – but you need to  do so in a way which doesn’t risk exhausting the fund. 

“The upside to an ARF is that it has more flexibility [than an annuity],” said Griffin. “The problem is that if you dip into your ARF too much too often, it will all be gone.”

Another big advantage of  ARFs is that any money remaining in your ARF after your death can be left to your next of kin. This isn’t always the case with annuities.


Don’t jump the gun if you are young

“The younger you are, the less of an impact today’s inflation will have on your pension,” said Griffin. “Anyone in their 30s or 40s or early 50s shouldn’t be too worried about the impact of today’s inflation on their pension as today’s inflation is so far away from when they will be accessing their pension.”  

All  the same though, make sure your pension savings are not stuck in cautious low-return investments when you are young. The younger you are, the higher the investment  risk  you can afford to take on. You will have a better chance  of beating inflation and building up a handsome pension pot by investing in suitable medium- to high-risk investments from  an early age. 

Remember inflation will in time subside – let’s  hope it  does so sooner rather than later though.

Get independent advice

Get independent financial advice before deciding – or making any changes to – where the money in your pension pot is invested. “There’s no magic bullet when it comes to investing to try to hedge against inflation,” said Peter Griffin of APT Workplace Pensions. “Finding funds that will offer protection against inflation will even be a challenge for a good investment manager. You need an adviser to help with this.”

Check if you have an inflation hedge 

Check if there is any protection against inflation already built into your pension. You may have a work pension where your annual pension increases each year – perhaps in line with inflation or the pay increases of those who replaced you.

Don’t dip in early

You may be able to dip into your pension from the age of 50, depending on your pension scheme. Be careful about doing so in a bid to manage rising living costs.

“You can dip into a pension early from the age of 50 if you have previously worked for a company and had a pension scheme with that company – and you then left that company and left the pension there,” said Griffin. “I wouldn’t recommend you dip into a pension early to fulfil a short-term need such as rising living costs. That short-term need could be even greater when you retire and remember, the whole purpose of a pension is to provide income for you in retirement.”