In Focus: Retirement Income  

How to inflation-proof your retirement pot

How to inflation-proof your retirement pot

People can make all sorts of plans for their pension pots but often forget about inflation. 

According to Ian Browne, pensions specialist at Quilter, inflation is the ‘forgotten risk’ for pension savers, and he has warned this factor can significantly derail retirement plans.

He said: “Inflation is a difficult beast to tame and may take multiple approaches to ensure you don’t run out of money in retirement."

FTAdviser In Focus caught up with Browne to ask him whether people were starting to become aware of the potential damage that inflation can do to the spending power of their pension pots post-Covid.

FTAdviser: Are people starting to wake up to inflation risk?

Ian Browne: While headline inflation figures remain at subdued levels, many investors are beginning to worry about price rises becoming a real possibility in recent months as the economy opens up.

Treasury forecasts expect the CPI rate to climb to 2 per cent for 2021, up from its current level of 0.7 per cent in January 2021.

While 2 per cent remains the Bank of England’s target inflation rate, the increase in consumer demand and spending, along with incredibly loose monetary policy, means many investors are concerned this could result in a prolonged inflationary environment.

FTA: What sort of effect can it have on a pension pot?

IB: Inflation can have a devastating impact on a retirement pot and could seriously change your retirement plans at very short notice. It is often the forgotten risk that can hide in plain sight.

With inflation creeping up, people won’t necessarily see prices rise so obviously and as such won’t see the impact this is having on their spending power.

At just 2.5 per cent inflation, you would lose nearly half of your purchasing power over 25 years if your money is held in cash. With interest rates and savings accounts currently failing consumers, retirees are at increased risk from inflation.

So while the state pension will, at the very least, always keep up with inflation through the triple lock, your private savings will not unless you do something about it.

FTA: What sort of action can people take to protect their portfolios?

IB: Firstly, get your investments right. If you have a long-term time horizon then you want to be considering if your attitude to risk is high enough.

Equities give you the best opportunity to outperform inflation over the long-term and have been shown to outperform every other asset class over the long-term.

Review the investments your pensions are in and if you have a time horizon of ten years or more, check you haven’t been invested in a pension scheme’s default fund. Often these will have a mix of assets that may not be appropriate for the amount of risk you may be able to take.