Inflation and how this impacts us financially is understandably a constant worry. Many of us have first-hand experience on how inflation is impacting our energy and food bills but what effect does inflation have on our pensions?
What do we mean by inflation?
Inflation means ‘a rise in prices’ particularly on specific types of goods and utilities over a period of time. This in turn can impact people’s ability to cover their daily needs.
How does inflation affect my pension?
The Bank of England sets the UK base rate and is responsible for keeping inflation at a low and stable level (target of 2%). When inflation is low, a pension will usually grow faster than inflation over time.
However, when inflation is high, pensions and investments simply can’t grow as quickly and will struggle to keep up. If high inflation continues over a long period of time, inflation will start to reduce the value of a pension pot. This sounds scary but, it’s not unusual to see your investment go up in value as well as down during your working life.
What can you do to manage your pension during a period of high inflation?
It’s important to keep in mind that pensions are designed to be long-term investments over the course of your working life. So, assuming you started saving early on in your career, you could have over 40 years’ worth of pension savings invested. It’s not unusual to see your investment go up in value as well as down during this time.
However, we understand not everyone can afford to pay into a pension right now, and that’s ok. Did you know there are other ways you can manage your pension during periods of high inflation?
Take a look at our How to manage your pension in a cost of living crisis article. It contains practical tips and simple steps to help you feel in control of your pension. And the best bit… these won’t cost you a penny!
I’m already paying into a pension, what should I do?
If you’re eligible for auto enrolment and can afford to keep paying into your workplace pension scheme, the good thing is it’s not just you who pays in, but also your employer – and you get tax relief on top from the government.
This provides an ideal opportunity to build a substantial pension pot in a tax efficient way, whilst benefiting from additional contributions from your employer.
Even taking short breaks in your pension contributions can hugely affect the amount of money you will have in your retirement. It’s always advisable to work out if the short-term gains will be worth it over the long term.
If you do need to pause your pension contributions for now, it’s worth setting a calendar reminder for 3-monthly periods, as the sooner you can start paying back in, the better.