How to build an inflation-ready pension plan

By September 21, 2022Pensions

With UK inflation now standing at 10.1% (a 40-year high) and possibly set to rise to 18% early next year, pensioners (and those nearing retirement) are understandably looking to understand how to protect their nest egg. In this article our financial planning team at WMM offers some ideas on safeguarding your pension(s) against inflation, helping you to enjoy a sustainable and comfortable retirement. 


Invest in (but don’t rely on) your State Pension

The UK State Pension is one of the few sources of retirement income that offers a guaranteed annual increase of at least 2.5% (more, if CPI inflation or average wages are higher). In April 2023, it could rise as much as 10%. This would take it from the current £185.15 per week to around £203.67. Your State Pension lasts for the rest of your life and is not affected by stock market movements, due to its financing via National Insurance contributions.

However, the State Pension is not enough, alone, for most people to live a comfortable retirement. It is also coming under increasing scrutiny due to affordability. Liz Truss, the UK’s new Prime Minister is exploring whether the “triple lock” system can be kept due to its high cost. As such, it is wise to also build other non-State Pension income sources into a retirement plan.


Defined benefit pensions & annuities

Some employers – such as the NHS and Police – offer their workers a defined benefit pension which can greatly mitigate the impact of inflation on a retirement plan. These schemes offer a guaranteed, lifetime income in retirement (e.g. based on years of service and average career earnings) and often this will rise each year with inflation. 

Speak to a financial adviser, therefore, if you are considering transferring away from a defined benefit (or “final salary”) pension as the benefits are often attractive and difficult to replicate elsewhere. For those with defined contribution pension savings (involving a pension “pot”), buying an annuity can help to provide an indefinite, inflation-linked income in retirement. 

Annuities have been out of fashion for a while due to low interest rates, leading to relatively low annuity income offers. However, with rates now rising again, this may start to change.


Examine your strategy & withdrawal rate

If you see the value of your pension going down, be careful not to panic and impulsively sell your investments. Remember, not only does this potentially serve to crystallise your losses, but the cash you are left with is especially vulnerable to high inflation (due to poor interest rates on regular savings accounts). 

With that said, it often makes sense to re-examine your investment strategy as you near retirement. This may, or may not, involve moving from “riskier” assets to more “cautious” ones which provide lower volatility now, but with likely lower future returns. A lot will depend on your own unique plans for retirement, but just remember that if you plan to tick off a few ‘bucket list items’, or expect a long and healthy retirement, then you may need those higher returns!

It can also help to discuss your “safe withdrawal rate” with your financial adviser when the cost of living goes up (i.e. the amount you can regularly take from your pension savings without high risk of depleting them). Taking less each month, in the short term, may help your pension keep growing over the long-term as the remaining funds stay invested. Generally, a safe withdrawal rate of 4% from pension savings is sustainable in the UK. During high inflation periods, however, this may need to be temporarily lowered – e.g. to 3% or even less.



Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 


This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).