How to make your pension last a lifetime in a world of high inflation

An older couple filling out forms

In recent months, you can’t have missed the headlines that the UK is undergoing a large spike in the rate of inflation. According to data from the Office for National Statistics (ONS), the Consumer Price Index rose to 9% in the year to April 2022.

As you might imagine, prolonged inflation can seriously affect your progress towards your long-term goals. This is especially true when it comes to retirement, as the wealth you accrue for this important chapter of your life may need to last for several decades.

If you’re concerned about the recent rise in the rate of inflation, read on to find out some useful tips for helping your pension to last a lifetime.

Even a relatively low rate of inflation can pose a problem for you in the long term

On a national scale, a small amount of inflation can be useful as it helps to keep the wheels of the economy turning. This is why the Bank of England (BoE) has an annual target of 2%, as the gentle upwards pressure on prices helps to encourage spending.

Of course, for the individual, it is a different story. In the long term, even a small amount of annual inflation can be problematic for your finances. One of the best ways to see this is with the BoE’s inflation calculator, which can show you the effect of rising prices over time.

According to this, goods and services that would have cost £10,000 in 1991 cost £22,844 in 2021. This is due to an average annual inflation rate of 2.8% over the 30-year period.

As we discussed in a previous article, thanks to advances in medicine and technology, you may enjoy a much longer life than your parents or grandparents.

Of course, this can be something of a double-edged sword as while you may get to enjoy your retirement for longer, your pension wealth might also have to support you for a greater period of time.

With this in mind, it’s important to inflation-proof your finances so that you don’t run into any unexpected problems when the time comes to retire.

You may need to reassess your tolerance to risk when investing

One of the most serious ways that rising inflation could affect your long-term plans is that it reduces the real returns of your investments.

For example, if your portfolio grows in value by 5% in a year, this may seem like a strong rate of return. However, if during this same time frame, the rate of inflation rises to 4%, then your real return is only 1%.

This is obviously a problem, as with reduced growth you may not have enough wealth to support your desired lifestyle in retirement. To remedy this problem, you might need to make your investments work harder for you.

If you want to achieve stronger growth, you may have to raise your risk tolerance when investing.

Typically, the greater amount of risk you are willing to tolerate, the greater the potential return. This can help you to outpace the rate of inflation and maintain your progress towards your financial goals.

Of course, exposing yourself to more risk can sometimes pose problems of its own, especially during periods of volatility. This is why, if you’re considering a change of investment approach, it can be useful to seek professional advice, so that you can make a properly informed decision with your wealth.

Finding a sustainable withdrawal rate can help your pension funds last longer

If you want to ensure that your pension can support you throughout retirement, it’s important to find a withdrawal rate that’s right for you. This can be a critical part of long-term planning, as taking too much can quickly deplete your funds.

This can be easily done if you don’t know how much a sustainable amount is. According to a recent report by the Financial Conduct Authority, more than two-fifths of retirees surveyed were making withdrawals of 8% of their funds each year.

During periods of high inflation, when rising prices are eating away at the value of your wealth, it’s more important than ever to know how much you can sustainably withdraw from your pension.

If you want to be able to make properly informed decisions with your pension wealth, working with a planner can really benefit you. They can help you thoroughly assess your goals to ensure that you have enough to support your desired lifestyle throughout retirement.

In this important chapter of your life, money worries are the last thing you need. Working with a professional can help to give you greater peace of mind to know that you’re building your retirement wealth as effectively as possible.

Get in touch

If you’re concerned about the impact that inflation could have on your long-term plans, we can help. Email enquiries@bowmorefp.com or call us on 01275 462 469.

Please note:

This article is for information only. Please do not act based on anything you might read in this article.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

The value of your investments can go down as well as up, so you could get back less than you invested.

Bowmore Financial Planning Ltd is authorised and regulated by the FCA.