In the UK we have recently seen a swing from a prolonged period of low inflation to high inflation very quickly. With rising costs on our day-to-day expenses this will hopefully give you some clarity on how your pension income will be affected and how short term economic impacts can be managed, still focusing on your long term goals.
An inflation linked pension such as the State Pension, Defined Benefit Pensions and some annuities will help reduce the impact of higher inflation. Understanding if all the pension is linked to inflation or if it is capped (i.e 5% pa) helps determine how your income will keep place with rising costs.
Some pensions provide a fixed income including some annuities and (some) final salary pensions. This is where higher inflation can have a bigger impact on your finances. The same pension can cross both fixed and inflation linked, which is where having a clear understanding of what you can expect is very important.
The next stage is looking at how you can bridge the gap between raising costs and either fixed or limited income. This would typically be done through a money purchase pension (drawdown income*), this can provide an adjustable income throughout retirement. Some years you will need more income and some years your income need will reduce….but how do you know if this is sustainable?
This is where your long-term plan comes into play. A good retirement plan isn’t set in stone but is flexible to meet your changing needs up to and during retirement. Most people will have one inflation linked pension, the State Pension, but some may have 2, or more. But how can you adapt in years where your living costs are higher and what impact may there be by taking more income than planned.
Understanding that there will be years of high inflation or negative growth on pensions isn’t anything that will adversely affect your retirement providing you have prepared for it, an adjustment will help today without sacrificing tomorrow.
What if you don’t have a plan? This is where some people may experience retirement anxiety. It is not that they are in financial trouble, but they don’t understand what options they have now or what impact their actions today may have in the future. If there is little long-term impact then this is something that should not cause worry.
The main thing now is understanding; what you get now, what you will get and how it will behave. Any additional actions should be considered and form part of a long-term plan, having this understanding should allow you to make financial decisions to ease concerns and ensure you can meet rising costs.
Understanding pensions can seem like a minefield, but speaking to a Financial Planner can give you a greater understanding of your finances now and in the future.
*taking an income from your pension pot
The content of this blog is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions.