Pension experts are warning that those planning for retirement will need to significantly increase their pension pots to keep up with soaring inflation. Key points include:

• Current CPI inflation is at a 30-year high of 6.2% and the Bank of England expects it to increase further in the coming months.
• Someone retiring at the end of 2021 would need to retirement pot of £179,000 to get the same purchasing power as someone retiring in 2000 with £100,000.
• Drawdown customers need to have a long-term plan in place for managing inflation and make sure any withdrawals are sustainable in the long-term.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown commented: “Pensioner purchasing power is taking a pummelling as inflation soars. Pensioners are particularly at risk from the impact of inflation in that they live on pensions and savings which they have accumulated over their working lives and this pot may need to last them twenty years or more.

“If they don’t work, then they don’t have wages to further supplement this income, so they need to plan carefully on how to inflation proof their income for the long term.”

According to Hargreaves Lansdown, someone retiring in 2000 with a pension of £100,000 would need £179,000 if they retired at the end of 2021 to maintain their purchasing power. Inflation has averaged at around 2.8% during this time but there have been significant peaks and troughs that need to be navigated.

Further advice

While, they say, it is a good idea for people in retirement to keep one to three years’ worth of expenses in cash to supplement their income as needed, they should beware of holding large portions of their wealth in cash long-term. “Even in relatively benign conditions inflation will eat away at your purchasing power,” adds Helen Morrisey, “and with it currently running rampant, it could decimate your retirement planning if you rely on keeping your wealth in cash.”

“Taking a flexible approach will help your retirement income remain resilient in the face of inflation.”

Managing inflation in your plans

The perceived threats around inflation may – or may not – be long term, depending upon which commentators you listen to, and one concern is that the 1.5% inflation rate predicted by some for 2024 might indicate a recession. Certainly, there was little for the least well off pensioners in the Chancellor’s Spring Budget, and a “jam tomorrow” promise of a 1% cut in income tax for better off pensioners in 2024.

Perhaps the bigger story is the global sell off of Gilts and Bonds. Most people in or approaching retirement can normally accept a cautious to moderate or moderate investment risk for their portfolios, and these portfolios contain anything between 15% and 50% allocations in gilts and bonds: these portfolios may take longer to recover from the recent falls than those portfolios that are more heavily weighted towards equities.

Mark Soper ACC has recently written a longer article on how to manage inflation within your retirement finance plans, making use of the tools within the RetireEasy LifePlan. You can find that here: https://www.retireeasy.co.uk/news/inflation-back-retireeasy-help-plan