If you have worked hard, saved all your life, and created a plan for exactly how you’ll spend your money in retirement, it can be frustrating for a period of high inflation to chip away at those plans.
Inflation matters at every stage of life, but it becomes especially important once you’ve stopped earning and started drawing on your savings. In retirement, your pot isn’t being built up in the same way, so rising prices can have a more lasting impact, and a retirement income that feels comfortable today may not stretch as far in five or 10 years.
So, the challenge is to find the right balance between drawing income when you need it and keeping enough of your money working in the background so it can continue to outpace inflation over the long term.
Read on to find out how inflation can impact your retirement and what you can do about it.
Inflation can erode the real value of your savings over time
If inflation rises faster than the returns on your savings and investments, the real value of your retirement pot will start to fall. Although on paper, your money might still be growing, it will be losing its purchasing power.
Over time, this may mean you need to withdraw more than you’d planned to maintain the same standard of living, which can affect how long your savings will last.
Moreover, if your expenses rise and you need to increase your withdrawals, you could also move into a higher tax bracket or pay more tax overall.
As such, it’s important to prepare for how inflation could impact your retirement, and to ensure you have factored it into your planning.
Structuring your pension withdrawals can help with inflation and improve your efficiency
Your pension is typically held in an investment fund, which means its value can rise and fall in the short term but is also likely to grow over time. So, when you take money out, you’re moving it from an invested pot into cash.
While cash is essential for your day-to-day spending and can give you a buffer for emergencies, over longer periods, it is less likely to keep pace with inflation than market investments, meaning its real value can gradually erode. If you hold too much in cash for too long, you may find it doesn’t stretch as far as you’d hoped.
This is why structuring your withdrawals can be key to ensuring your retirement fund keeps pace with inflation and lasts over time. Rather than drawing income without a plan, it can be helpful to think in terms of balancing your immediate needs while allowing the rest of your portfolio to stay invested.
A good starting point is to get clear on what you actually need to spend, and to revisit that regularly. Retirement isn’t static, and neither is inflation, so what feels sufficient today may need adjusting in a few years.
It’s also worth thinking carefully about where your income is coming from and how this could affect its tax treatment. Pension withdrawals are typically taxable beyond your tax-free lump sum, whereas money held in ISAs can be accessed without paying tax. So, using the tax-free portion of your pension, your ISAs, and the Personal Allowance can give you more flexibility.
You can read more about creating an efficient and effective withdrawal plan in our previous article on the topic.
Diversification can help your retirement fund remain stable
You want your retirement savings to be steady and reliable, but they also need to keep growing so inflation doesn’t slowly erode their value.
Investments can help with that growth, while cash can often struggle. However, markets are subject to volatility, and that can feel unsettling when you’re relying on your portfolio for income.
Nonetheless, not all investments behave the same way, and as retirement approaches, many pension providers gradually shift your holdings towards lower-risk assets to help smooth out any volatility.
You can also help your retirement fund remain stable amid fluctuations by diversifying some of your income sources. Spreading your money across different types of investments and assets can help reduce the impact of market swings. Some, such as inflation-linked bonds, are designed to rise in line with the cost of living, which can offer an extra layer of protection.
One way to effectively diversify your retirement fund and withdrawals is through a ‘bucket strategy’. This involves dividing your retirement savings into separate pots based on when you’ll need the money and how much risk you’re comfortable taking.
Typically, this means splitting your wealth into three pots:
- Short-term needs (up to around two years): This is usually kept in cash or easy-access options, such as Premium Bonds, so it’s there when you need it.
- Medium-term needs (roughly three to five years): These are often held in bonds or other fixed-income investments.
- Long-term needs (five years and beyond): This portion is usually invested in equities.
By separating your money this way, you can cover short-term spending without having to sell investments at a bad time, while still giving part of your portfolio the chance to grow over the longer term.
A financial planner can help you bring all of this together to create a portfolio that supports your income, reflects your risk tolerance, and helps your retirement fund stay on track over the long term.
Get in touch
Our team of independent financial advisers in Lewes is here to support you in creating a retirement plan that is designed to manage rising costs and inflation while ensuring your short-term needs are met.
To find out more, please get in touch by emailing us at financial@barwells-wealth.co.uk or by phone on 01273 086 311.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Production