A sharp fall in the value of sterling over the past few months means that inflation is rising as the cost of the goods that we import – particularly food and energy – goes up.
This is desperate news for savers who have saw the base rate cut to a new all-time low of 0.25% in August 2016.
If you are coming up to retirement or have just started taking your pension, it is as vital as ever that you ensure your capital has as much protection as possible from the damaging effects of inflation.
So what are your options?
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1. Index-linked annuities
Although the change in the pension rules in 2015 meant that most people no longer have to buy an annuity when they retire, these products can still help protect your cash against inflation. But this means choosing a rising or index-linked annuity, which gives higher payments year after year.
The problem with annuities at the moment, however, is that rates are very low by historical standards – and if you opt for an increasing income, the amount you get in the early years at least will be lower still.
It may, however, be worth using a proportion of your retirement savings to buy such an annuity so you have at least some guaranteed, inflation-proof income to fall back on – alongside your state pension entitlement.
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2. Stock market investments
The 2015 pension rule changes were designed to make it easier to keep pension funds invested in assets such as shares after retirement.
In this way, capital is able to continue growing throughout old age – this is increasingly important given that most people today live for 20 years or more after they reach pension age.
To keep pace with inflation, however, you may need to take a more risky approach with your investments: this could mean putting more of your cash into shares rather than “safer” bonds.
If you are unsure about how to invest to beat inflation or are not confident about choosing the right investments, seek guidance from an independent financial adviser.
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Putting money into the buy-to-let sector has become more popular among retirees since pension rules were relaxed in 2015.
Over recent years returns for landlords – both in terms of rising rents and house-price appreciation – have been pretty solid. This may well prove to be the case in the future but, as with the stock market, there are no guarantees that the value of your investment will not fall.
With rates on savings accounts as low as they have ever been, however, holding your pension in cash is a sure-fire way to lose money in real terms if inflation rises above the Bank of England’s 2% target – as many analysts expect it to do over the coming months.
As such, it is well worth considering one or more of the options above.
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