How to hedge against the potential ravages of high inflation

The percentage of the soon-to-be-retired who are reliant on DC (rather than the more generous defined benefit) pensions is close to the half-way tipping point.

For example, only 47 per cent of the youngest tranche of boomers aged 58 to 61, which Dunstan Thomas contacted during a nationwide survey it commissioned earlier this year, had savings in a DB pension. Most of those DB schemes will have been closed for contributions many years ago. 

And since pension freedoms, annuity purchase at retirement has remained stubbornly low. In the 2019-20 tax year, the Financial Conduct Authority recorded that just 10 per cent of the 673,831 individuals who accessed their pensions for the first time bought an annuity. 

So, that means that protecting long-term savings earmarked for retirement from the twin-effects of falling stock markets and high inflation is a much higher priority for many more people approaching retirement and planning decumulation today.

For many, it may feel like it is too late to diversify if they have not done so already. After all, portfolios that were heavily exposed to equities have seen falls of somewhere between 20 and 30 per cent, on average, in 2022 alone. That is a lot of value lost very quickly. Would it not just be crystallising those heavy losses? 

Inflation is still rising as we battle to restore the health of supply chains and keep a lid on increasing energy prices amid the seemingly endless Russian conflict in Ukraine

One strategy is to wait for markets to slowly recover their poise, and for inflation to begin falling. But when will that begin happening?

Deutsche Bank has predicted that UK consumer pice index inflation will not return close to the Bank of England’s target of 2 per cent until early 2025.

Right now, inflation is still rising as we battle to restore the health of supply chains and keep a lid on increasing energy prices amid the seemingly endless Russian conflict in Ukraine, which continues to wreck a country’s infrastructure, cause untold human misery, while throttling Europe’s gas supplies.

For those looking at diversification to tackle the twin destroyers of value – equity falls and inflation rises – we have looked at some options worth considering.

1. Inflation-linked bonds or ‘linkers’

You are in essence investing in government debt here and the great benefit of these bonds is that they rise with inflation as the name implies.