One likely consequence of the conflict-induced disruption to global trade is that we\u2019re going to see another spike in inflation. Given the Bank of England has failed to hit its target of 2 per cent inflation since 2020, this is going to be unwelcome news. But it is particularly worrying for those already in retirement. So what does it mean for our pensions?<\/p>\n
When you\u2019re in work, pay settlements tend to broadly keep up with inflation over time and in the good years they\u2019ll exceed inflation, meaning you feel better off. But when you\u2019re retired you\u2019re at the mercy of whatever your pension gives you. Not all pensions are the same, though.<\/p>\n
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Inflation really matters. Even at the (apparently theoretical) target rate of 2 per cent, after ten years\u2019 inflation, an income of \u00a31,000 would be worth only \u00a3820. At 3 per cent yearly inflation, that \u00a31,000 income would fall in value to \u00a3744. Life expectancy at age 65 is about 20 years, so that\u2019s plenty of time for inflation to erode your standard of living if you\u2019re on a fixed income.<\/p>\n
The full new state pension has been raised to \u00a312,547 for the 2026-27 tax year. Thanks to the triple lock, it is guaranteed to go up by the highest of inflation, earnings growth and 2.5 per cent, which means if left unchecked it would eventually consume the known universe. This is unsustainable. <\/p>\n
The government has promised to keep the triple lock for the duration of this parliament. Even if it sticks to this, the triple lock\u2019s future beyond the next election is uncertain but the inflation-proofing element at least, is likely to stay for the foreseeable future.\u00a0<\/p>\n
You have the option to defer your state pension, in which case it will be increased by 5.8 per cent for every year you delay taking it.<\/p>\n
Most people don\u2019t buy an annuity. Instead, they either take their pension pot as a cash lump sum (typical for smaller pots of money), or they use a drawdown arrangement to keep the money invested and draw an income from the fund. In principle, keeping your money invested in shares, property and the like should be a good hedge against inflation, but if you take too much income or make poor investment choices, unlike an annuity, you could run out of money entirely. So, drawdown can deliver inflation protection, but the risks and management costs are higher.<\/p>\n
With a money purchase pension, you arrive at retirement with decisions to make about what you want to do with the money you\u2019ve saved up. If you want to lock into a guaranteed income, then the difference between a level annuity and one linked to inflation is significant. A pot of \u00a3100,000 would buy you a level income of about \u00a37,746 a year at age 65, but if you want to build in inflation proofing, it would drop to around \u00a35,293 a year.\u00a0<\/p>\n
With final salary pensions, your inflation proofing is guaranteed by the pension scheme, however it will probably be capped at about 5 per cent a year. Different slices of your final salary scheme income may have different rates of inflation proofing, and some may be at the discretion of the trustees. Older tranches of final salary pensions, earned back in the 1980s, may not have any inflation proofing at all.<\/p>\n
For most people, retirement income will be a patchwork of different pots of money and entitlements, each with their own set of terms and conditions. Trade-offs may need to be made, between short-term income needs and long-term inflation proofing. My advice would be to take the time to find out the terms attached to each of your sources of income and pots of money and to make informed decisions over those where you have discretion.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"One likely consequence of the conflict-induced disruption to global trade is that we\u2019re going to see another spike…\n","protected":false},"author":2,"featured_media":517360,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[84,4176,4174,4175,56,54,55],"class_list":{"0":"post-517359","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-personal-finance","8":"tag-business","9":"tag-finance","10":"tag-personal-finance","11":"tag-personalfinance","12":"tag-uk","13":"tag-united-kingdom","14":"tag-unitedkingdom"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/posts\/517359","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/comments?post=517359"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/posts\/517359\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/media\/517360"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/media?parent=517359"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/categories?post=517359"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/tags?post=517359"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}