What kind of effects does inflation have on your pension?

Because of the impact that inflation is having on people’s ability to spend money in the UK, millions of households are being forced to readjust their budgets, renounce certain indulgences, and reevaluate their approach to saving for the future. In this article, we hope to demonstrate not only how inflation operates and how it impacts each and every one of us, but also, and perhaps more crucially, how it is still feasible to plan for the needs of the present without jeopardising the financial security of the future, such as pensions. In the face of a looming inflationary threat, what steps can we take to protect our pensions? Are they still the most effective means of putting money away for our retirement?

Trusted Pensions

What exactly is the “inflation”?

An economy is said to be experiencing inflation when there is a general trend of rising prices. To put it more simply, there are too many people going after too few products with too much money. The monetary and fiscal policies of a nation can both have a role in the development of inflation or its absence. For example, there can be an unbalanced relationship between borrowing money and spending it. Alternately, growing prices of commodities may have an effect on the pricing of imported goods or exported goods.

The rate of inflation in 2022

At this time, as we get closer and closer to the end of the year 2022, inflation has been triggered all over the world partly as a result of the hostilities that have been occurring in eastern Europe. Sanctions have been placed on Russia by western countries as part of an effort to prevent further Russian aggression. This has resulted in the beginning of a trade war, in which Russia is depriving western countries some of its critical products as revenge for the sanctions against it. Gas is one of the products that may be exported. As a result of this, demand cannot be satisfied, which causes prices to increase. Because fuel is required not only in homes but also in all facets of business, the current state of things is stifling the growth of economies all over the world.

How can we predict when the inflationary period will begin?


The Office of National Statistics in the United Kingdom performs price checks on around seven hundred different commodities that are regarded to be necessities on a monthly basis. The CPI, which stands for the Consumer Price Index, is another name for this metric. Following this, the prices are contrasted with those from the previous year. This shift is what economists refer to as the rate of inflation.

The change is recorded by the Office of National Statistics as a percentage increase or reduction respectively. Therefore, if the same seven hundred products cost one thousand dollars a year ago and one thousand one hundred dollars now, it is an increase of one hundred dollars on prices that people really pay on a daily basis. This amounts to 10% when expressed as a percentage of the total cost at the outset. On a more granular scale, the price of a commodity that was ten pounds the year before is likely to be eleven pounds today.

The average annual rate of inflation in the UK during the past two decades has been close to 2%. This is an interest rate that is believed to be stable, and the Bank of England works hard to maintain it at this level. On the other hand, as of September 2022, the rate of inflation was 9.9%, and many specialists anticipate that it will continue climbing in 2023.

The Repercussions for Activities of Daily Living

The psychological repercussions are the first to be felt. People have a sense of impending danger as rising inflation continues to dominate the news. To guarantee that their income can cover all of their expenses, individuals need to come up with innovative solutions. They can make an effort to restrict their spending on luxury and give up their habit of storing money for the future. Unpredictable prices, as a result, not only have an effect on the standard of living in the present day, but they also have the potential to wreak havoc on retirement years.

Repercussions for one’s pension

When estimating how much money you will get from a pension in the future, you should always take into account the impact that inflation will have on the value of your investment. For illustration’s sake, let’s imagine that you tuck away one thousand pounds at home and leave it there for ten years. During that period, inflation is at a rate of 10%. This indicates that your pound sterling is worth one hundred pounds less now than it was five years ago. The value of it has decreased due to inflation. In other words, despite the fact that a fund may advertise a certain pay out, the purchasing power of this sum will be affected by inflation.

A pension paid by the state.

The fact that the State Pension in the UK adjusts its payments according to the rate of inflation is a very desirable feature. The amount of the State Pension is adjusted in accordance with the rate of inflation thanks to the triple lock mechanism. It is important to note that this system was put on hold after the covid pandemic, but Prime Minister Liz Truss has stated that she intends to bring it back into effect.

Your private pension

Even if regular private pensions do not function in the same way as the state pension, it is likely that they will rise at a quicker rate than inflation if the latter stays relatively unchanged. When inflation rises in a manner that is both unpredictable and exponentially rapid, things may begin to go poorly.

Therefore, it is essential to have a solid understanding of the growth of your pension. Your pension provider should be able to give you with an up-to-date report if you ask for one. Does it lag behind the rate of inflation? Is it functioning effectively? Do you have access to other pensions that you could consolidate into a single, high-performing pension? Is it a good moment to up the ante on the donations, or should they be cut back? Even under the best of circumstances, pensions may be difficult to understand, therefore consulting a certified financial adviser can often be quite beneficial.

Taking your pension

When the time comes for you to start drawing from your pension, you will want to be aware of the method that gives you the most money while minimising the amount of money lost to inflation. For instance, if you are considering purchasing an annuity, you should consider purchasing an ascending annuity rather than a fixed annuity since the former will make an effort to keep up with inflation while the latter would see its value diminish due to inflation. It is possible that real-time inflation will have an impact on your finances if you choose to implement drawdowns.

What are some ways I can keep putting money down for my retirement?

Obviously, this is not a simple task. The most pressing concern is ensuring that basic needs are met in the here and now. However, if you do not plan for tomorrow, it is doubtful that you will be able to provide for your future. To put it another way, you have to ensure that planning for the future is still one of your primary concerns.

Inflation is not likely to be a moment when you decide to boost your savings, but it should be a time when you review your financial situation to ensure that your funds are being managed effectively and are located in the appropriate locations. Be sure you have a solid understanding of how your retirement and savings accounts are faring. As was said earlier, now is a good moment to evaluate the usefulness of your pensions and savings plans (you may get a current report by contacting Human Resources or your pension provider), and to make adjustments where necessary. If you have more than one pension, now could be the time to think about consolidating all of your resources into the fund that offers the greatest return on investment. Again, this is something that should never be done without first consulting the guidance of a licenced financial consultant.

The most essential thing is to avoid compromising your future in order to pay your financial obligations now. Instead of decreasing the amount you contribute to your pension, you should think about making it more efficient with the money you already have. Remember that if you are above the age of 55, you have the option of withdrawing money from your pension to assist you in meeting your financial obligations; however, you should only do this with the assistance of a licenced financial consultant.

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