How to protect your pension savings from high inflation
Inflation is a current economic reality that is affecting everyone, but those who are in retirement or approaching it may be feeling it particularly hard. Our research shows that more than half (54%) of people aged 50 and over fear they won’t have enough income to survive financially when they stop working due to the rising cost of living. The decisions facing those in or approaching retirement are even tougher, as they have to strike a delicate balance between drawing enough income to meet today’s costs, while not drawing too much and running the risk of running out of money in the future.
Although inflation won't stay high forever, things could get worse before they get better. The good news is that there are steps you can take to protect your retirement income. Here we outline three of them:
Consider an annuity: Annuities, which involve trading some or all of your retirement pot for a guaranteed income, have fallen out of favor in recent years due to pension freedoms and low interest rates. However, since December 2021, interest rates have risen and so have annuity rates. A 65-year-old buying the most basic annuity with a £100,000 pot can now secure an income of around £6,600 a year, compared to £4,800 in January 2021. To offer protection from future inflation, it's worth considering an inflation-linked annuity, where the annuity payments increase each year in line with rising costs. However, keep in mind that starting payments will be significantly lower.
Adopt a bucket strategy: Spreading your money across different asset types, such as cash, shares, and bonds, is a great way of reducing the amount of risk you take and protecting your retirement pot from inflation. For those using income drawdown for some or all of their funds, one way of achieving diversification is by using a bucket strategy. With this approach, you divide your pot into a few segments determined by when you plan to draw income from them. For example, bucket one for the first three years, bucket two for years three to ten, and bucket three for ten years plus. Bucket one will typically be invested in cash to cover any immediate and short-term needs, while bucket two and three can be invested in assets that offer a better chance of beating inflation such as government and corporate bonds, and stocks and shares.
Review your pension regularly: It's important to review your pension regularly to ensure it's still on track to meet your retirement goals. This includes checking the fund's performance and making sure your investments are still in line with your risk appetite. If your pension is underperforming, consider switching to a different fund or provider. It's also worth looking into any pension consolidation options if you have multiple pensions.
In conclusion, inflation is a major concern for those in or approaching retirement, but there are steps you can take to protect your retirement income. These include considering an annuity, adopting a bucket strategy, and regularly reviewing your pension. It's important to remember that inflation won't stay high forever and that taking the right steps now can help ensure a secure financial future.
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