- Retirees must prepare for the long-term impact of inflation on their retirement income. 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.*
- While average inflation over this time-period was 2.8% it can fluctuate wildly. In September 2008 CPI inflation was 5.2% while in October 2015 it was -0.1%.*
- 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.
- 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:
“Pensioner purchasing power is taking a pummelling as inflation soars. The prices of food, utility bills and petrol are all on the rise. 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.
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. For example, inflation in September 2008 hit 5.2% while in October 2015 it was close to zero. Fast forward to today inflation is at a thirty-year high of 6.2% and set to go higher. Pensioners need to adopt a flexible approach to managing their income where possible.
While 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 and with it currently running rampant it could decimate your retirement planning if you rely on keeping your wealth in cash.
Pensioners with annuities could see their income increase if they opted for an inflation-linked product, otherwise their income remains flat regardless of what inflation does. If you decide annuities are the right retirement income product for you then it is often a good idea to annuitise your pot in slices over a period of time rather than doing the whole pot in one day as you risk locking into low annuity rates that you cannot amend later.
Income drawdown can be useful as being invested in the markets means your pension has a better chance of keeping up with inflation. However, care needs to be taken to ensure the income withdrawn remains sustainable over the long term. Taking large amounts out early in your retirement may cause problems later if your investment returns can’t keep pace and you risk eating into your capital.
It is better to adopt a natural yield strategy where the amount of income you take is no more than the investment returns your pension generates. There will be times when you have to take less than you need but having a cash buffer will enable you to ride out any short-term bumps. Taking a flexible approach will help your retirement income remain resilient in the face of inflation.”
* Inflation calculator | Bank of England