How does inflation affect my pension?

How does inflation affect my pension?

The UK is experiencing inflation rates at a 40-year high, resulting in a cost-of-living crisis that’s left millions of people struggling to pay the bills, and that’s putting it lightly.

The effects of this crisis are not only incredibly far-reaching, but they look set to stick around for a while.

For those of you wishing to look after your pensions, it’s important that you recognise the effects that high inflation can have on the value of your savings.

This way, it might become easier for you to make better financial decisions in the future, decisions that could help preserve your money, help it grow, and prevent shortfall, the term used to describe a pension that doesn’t perform as well as you expect it to.

What is Inflation?

Inflation is essentially when the price of goods and services rises, often leading to an overall decrease in purchasing power.

Currently, inflation is at such a high rate in the UK for a number of reasons, such as the war in Ukraine, stagnant wages, increasing fuel prices, the global decrease in raw materials, Brexit, and the monumental price hike in energy bills.

How Does it Erode Your Money?

Inflation can wear away your money over time, as ultimately, it means the number of goods you can buy with your wage today decreases in the future. Therefore, the value of your money decreases over time when experiencing periods of increased inflation.

In terms of your pension, this can provide a few unique challenges, the most prevalent of which is how your investments perform.

Your assets (provided your pension is invested in funds, like the majority of pensions), in turn, will need to work harder to keep up with the inflation rate. For example, if inflation grows by 10%, which it nearly has done in the UK, then your pension will need to grow by 10% simply to retain its current value.

It can be tempting to try and reduce your pension payments in order to keep up with your daily costs, but this should be avoided, if possible, provided you want to ensure you build the best pension pot possible.

This is because when markets rise again, you’ll have fewer shares, and fewer shares mean less value and a smaller final pension pot.

Investing in Pensions Can Be a Good Way to Combat Inflation

You could consider buying an inflation-linked annuity with your pension, but it’s worth noting that the stock market has often performed better than the interest rate. This means that it’s possible your pension will be able to weather the rising rate of inflation as long as it’s invested in the right place.

Plus, if you keep up with your contribution, your shares will continue to grow, and you’ll still benefit from tax breaks and compound benefits, making it a great way of growing your savings, hopefully even in times of high inflation.

Pension investments are a viable alternative to paying into a standard savings account when hedging against inflation. This is partly because a savings account lacks some of the key benefits a pension can provide such as tax relief, and they may not be able to offer a high enough interest rate to compete with inflation.

Before You Retire

It’s important to take inflation into consideration before you retire, as it could inform the amount of money that you’ll need to save to meet your goals in later life.

Inflation may hinder your ability to afford the kind of lifestyle you want. In this regard, it’s always important to consider when exactly you plan on retiring and how much money you’ll need to meet this timeframe.

iSIPP can Help

iSIPP can enable you to consolidate all your pension pots, making them easy to manage and giving you the choice of where and how to invest your savings.

It’s your money, and we can give you the services you need to manage it in a way that suits your needs perfectly.



Given the state of the UK’s inflation rates and the impact it is having on millions around the country, it is only natural that many have started to worry about their pensions and what high inflation might do to them. Hopefully, this article has helped you understand more about what inflation is and what it does to your money, as well as see how your pension can survive this tense time. Although things may be tough now it is likely to benefit you more in the long run if you continue to invest. Just make sure to consider the actual money you need in your retirement.




The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.


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