Inflation figures are currently at subdued levels, but investors are beginning to worry about price rises in the upcoming months as the economy starts to reopen.
HM Treasury expects the CPI rate to grow to 2% for 2021, compared with 0.7% in January 2021. But the increase in consumer demand and spending, alongside a loose monetary policy, is concerning investors as it could lead to a longer inflationary environment.
Financial services giant Quilter warned that, if this was the case, pension pots could be in danger, as inflation is the “forgotten risk” for savers.
Ian Browne, pensions expert at Quilter, said: “Inflation can have a devastating impact on a retirement pot and could seriously change your retirement plans at very short notice. However, 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% 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.”
Stay away from cash
Savers can mitigate the impact inflation can have on their pension and private savings, however, Browne said.
“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.
“As you reach retirement, consider keeping money invested in the stock market for as long as possible. This is a higher risk option, but with ‘safer’ asset classes offering little to no income it might be sensible to keep the money invested and rely on a cash buffer to cover your daily outgoings,” he added.
One thing Browne warned against is being too heavy on cash, considering that it provides “little to no return”.
“Cash is no longer the king it once was for retirees.”
Security of annuities
He added that, if savers want a guaranteed income that is linked to inflation, they should not overlook annuities.
“It used to be that when you started retirement you would cash in your pension pot and buy an annuity. The popularity of these products has since plummeted with the advent of pension freedoms and with rock bottom interest rates, they are unlikely to provide value for money unless you live to a very old age.
“However, if you want the security of a guaranteed income, with an inflation link, then they are definitely worth considering to give you that peace of mind. It’s never too late to buy an annuity, so it’s always worth checking the latest deals throughout your retirement. The older you are, or if your health has deteriorated, the better the deal could be.
“You should remember, though, that once you buy an annuity there is no going back.”
Review timings
Another way to mitigate the impact of inflation on pension pots is to delay retirement, Browne said, especially if savers can tap into other sources of income or wealth for the foreseeable future.
“Salaries tend to rise in line with inflation, so this will give you an opportunity to continue to contribute to your pension, take advantage of the tax relief available, and invest it to give you above inflation returns depending on your time horizon,” he added. “Furthermore, as you reach the later stages of working life, spending on things such as mortgages begin to decline, so make use of any additional savings by stashing it away in a pension.
“It is effectively the best savings account on the market for the over 50s and should be the last savings you should withdraw from.”
These are only some of the ways to try and beat the “difficult beast” that is inflation, which is why people should seek financial advice, Browne added.
“Getting professional financial advice is the best way to ensure you have a plan in retirement and that inflation is taken into account. Without it, you risk running the gauntlet and trying to manage the risk on your own.”
