Often when you think about retirement, inflation is not something that comes to mind. However, it can have a huge impact on your income when it comes to your retirement. Despite this, it is often overlooked when creating retirement plans.

This article will explore exactly how inflation is affecting pensions.

Understanding Inflation

Inflation refers to the ever-rising cost of living. This is not something you would notice on a day-to-day basis. However, throughout the course of your life and leading up to retirement, the price of goods and services creeps up causing a noticeable impact. It can mean your income and assets do not go as far as you would have originally thought.

Over the course of the last year with the Coronavirus pandemic inflation wasn’t seen to be as impactful as we saw in prior years. In February of 2020, the cost of living increased by 0.7% compared to a year prior.

However, an incredibly significant increase was seen in January of this year. The consumer price index has risen 5.5% in the past 12 months. Unfortunately, this is the highest we’ve seen it since way back in 1997.

Furthermore, even if you retired in the last decade, you would notice that your income is affording you less or needs to increase. A £30,000 income in 2010 would need to have increased to £39,337 just to maintain spending power according to the Bank of England. Now imagine the potential impact that inflation could have on a retirement that spans several decades. You would easily find that your income buys far less and you may not be prepared.

The Risk of Inflation is Higher Following 2015 Pension Freedoms

Many retirees today must consider the risk of inflation much more than previous generations. This is due to the Pension Freedoms, which were introduced in 2015. This changed how and when you can access your pension.

In previous years, there was a common way of retiring and creating an income. You would save into a pension during your work life and then purchase an

annuity that would provide a guaranteed income throughout retirement. This income was often linked with inflation meaning that retirees would not have to worry about how their spending power would change long-term.

However, today you can choose an annuity but there are several other options available as well. This includes the ability to withdraw lump sums or take an adjustable income through Flexi-access drawdown. Additionally, in some instances, inflation could mean that the value of your pension or other assets falls in real terms.

You must consider inflation when retiring to create long-term financial security leading into later life.

How To Reduce the Impact of Inflation on Your Retirement Plans

The impact that inflation can have on the type of retirement you can afford is considerable. However, there are steps you can take to manage the risk.

Purchase an Inflation-Linked Annuity

Annuities have become a lot less popular since Pension Freedoms were introduced. However, they can still play an important role in creating financial security for your retirement.

Some annuities are linked to inflation. What this means is that the regular income they provide increases each year alongside inflation which will preserve your spending power throughout retirement. Furthermore, this means that you will not have to worry about how a rise in the cost of living will impact your lifestyle as your income will rise to reflect this change.

Annuities are often shunned by retirees as they do not allow the same flexibility as other options. Your income remains the same and cannot be adjusted.

Additionally, you cannot leave an annuity behind as an inheritance for family members and loved ones.

You should always remember that you are not required to use your entire pension to purchase an annuity. A portion of your savings can be used to buy an

inflation-linked annuity which will provide some income stability whilst flexibly accessing the rest to supplement it when needed. It is important to understand how your income needs to change during retirement can help you in determining whether an annuity is right for you.

Refrain from taking out cash if you don’t need it!

Don’t be tempted to withdraw money from your pension if you do not need to do so. This can include withdrawing a 25% tax-free lump sum. Withdrawing money is likely to expose your money to inflation risk.

Over a third of people who had taken a cash lump sum from their pension stated that they had put their money in a savings account, according to statistics provided by a Canada life survey. A quarter of them also said they had put it in the bank. Furthermore, this money means your money is actually decreasing in its value. You should consider having an emergency fund but manage your withdrawals to reflect your needs.

You should also make yourself aware of the impact tax can have. After your tax-free lump sum, any money withdrawn from your pension can be liable for

income tax. Thus taking out lump sums may push you into higher tax brackets. If you don’t immediately need the money that you withdraw, you may often end up paying more tax than you need to.

Make Sure to Invest Appropriately for Your Retirement Fund

Investing can help deliver above-inflation returns which can help your money grow even past retirement. That being said, you also need to consider investment risk and what investments are most appropriate for you. Any investments you select should reflect your risk profile, goals and investment timeframe.

Recent surveys have also highlighted that some retirees are withdrawing money from their pension to invest. 7% said they withdrew money that would then be placed in stocks and shares.

Pension savings are likely to already be invested. Investing through a pension means your money can grow free from the capital gains tax. This creates a

tax-efficient way to invest. In a lot of cases, investing with a pension makes a lot of financial sense, even when you are withdrawing an income from your pension.

Managing Risk – How Inflation Is Affecting Pensions

Life is not without its risks and you cannot remove all risk from life. Pensions are long-term investments. The fund value can fluctuate and go down which can impact the level of pension benefits available.

Pension income can also be affected by interest rates when you come to take your benefits. The tax implications of pension withdrawals are based on your individual circumstances, tax legislation and regulation. These can be subject to change in the future as well.

An investment value can also go down as well as up and you may not receive the full amount you invested. It is important to remember that past performance is not a reliable indicator of future performance.

Our Pension Services

Here at Informed Pensions, we like to keep things simple. This is why we provide an all-encompassing Pension Review Service. Whether you want us to look at old pensions, plan your retirement or explain the options available to you – we will review your circumstances and help you with a plan that is best suited for you.

Pension advice is not right for everyone. This is why we offer a free initial consultation to help quickly assess your situation and whether you might benefit from a full advice meeting or discovery meeting.

Discovery Meetings

During the discovery meeting, we will build a complete picture of all your pension planning and show if you are on track to hit your objectives.

You will be able to see what level of income you can have in retirement and model how much tax-free cash you could take. We can show you the difference between taking an Annuity, utilising Drawdown or Cashout.

A specialist pension adviser can help with decisions that will affect the next 30+ years of your life! Our ongoing advice & support will ensure that you are informed and have clarity over your pension funds and retirement planning.


It is essential that you consider how inflation can affect your pensions and retirement planning. As we have discussed above, retirees today have to

consider the risk of inflation a lot more than previous generations. This is partly due to the Pension Freedoms that were introduced in 2015 which changed the way pensions can be accessed.

In order to reduce the impact of inflation on your retirement plans, it is essential that you remember to only take out money if you absolutely need it. Additionally, you should consider whether purchasing an inflation-linked annuity will also be of benefit.

Also, make sure you invest appropriately for your retirement fund. Investing can help deliver above-inflation returns that will ensure you grow money even past retirement. However, consider the possible risks involved with investments and which are most appropriate for you. Investments made should reflect your profile risk, goals and investment timeframe.

About the author:

Informed pensions offer expert pension advice and consolidation services to ensure you have the most rewarding retirement possible and the best opportunity to prepare for life after work.

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