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Inflation is a quiet thief. Ignore it, and it will steadily chip away at your savings and reduce the spending power of your money over time.
That’s bad enough while you’re still earning. And once you’ve retired and potentially living on more limited means, it can have a bigger impact on your financial wellbeing, forcing you to trim your budget and rein in your expenses in the future.
This means it’s essential that everyone takes inflation into account when thinking about their retirement income.
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Inflation refers to the steady increase in the cost of everyday items over time. In order for your money to maintain its spending power and keep pace with rising costs, your savings need to grow at least as fast as inflation, otherwise, your money loses buying power.
To show us how much prices have risen over the last 12 months, the Office for National Statistics tracks the average price of over 700 goods and services – including everything from yoga mats to baked beans – to produce the Consumer Prices Index (CPI).
The CPI for June 2025 was 3.6% - up from 3.4% in May. That means those items cost 3.6% more than they did a year ago. That’s the highest rate since January 2024.
There is also the CPIH, which is like the CPI but also includes owner occupiers’ housing costs (such as mortgage payments) and council tax. The Office for National Statistics says the CPIH is the most comprehensive standard of inflation.
The CPIH for June 2025 was 4.1% - up from 4% in May.
The CPI is used for the government’s target for inflation of 2% - a target that is not being met. Recently, rises in transport costs (especially fuel) and food costs have been some of the main factors keeping inflation relatively high.
These inflation rates mean that £10,000 today would need to grow to £10,360 in a year just to buy the same things (excluding housing costs and council tax), or £10,400 to buy the same things if those things include housing costs and council tax.
To protect your nest egg, you can’t just think about today’s inflation rate. You also need to factor in what might happen to inflation in the future. Unfortunately that’s an almost impossible task.
Justin Modray, the owner of Candid Financial Advice, says: “Trying to predict inflation is about as haphazard as predicting the weather, since no-one knows what will happen in the future.”
Inflation is now well down on its recent peak of 11.1% in October 2022, but it has recently spiked again due to rising energy and water bills.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, adds: “We’ve been on a rollercoaster ride with inflation in recent years and it needs to form a major part of people’s retirement planning strategies.”
So, what can you do? A good start is to review how inflation-ready your current retirement plan is. You’re likely to be building savings that include pensions, cash and investments and the inflation risk of each differs.
Anna Bowes, co-founder of The Private Office, adds: “It’s really important to know how your different sources of retirement income will change over time. Usually, final salary and other defined benefit pensions will have some inflation protection. The state pension currently has the triple lock guarantee – this ensures that your state pension increases by the highest of CPI inflation, average earnings, or 2.5% – whichever is highest.”
If you’re yet to retire, make the most of the inflation-proofing offered by the state pension by checking your national insurance record. You’ll need at least 35 qualifying years to get the full state pension. If you don’t have that, consider buying top-ups in the form of voluntary national insurance contributions.
If you have a final salary or career-average pension, you generally don’t need to worry about inflation here, as you don’t have a say in how it’s invested, and the pension you receive will automatically increase each year in line with inflation (although in some cases the maximum rise may be capped).
If you have a personal pension pot, one option in retirement is to buy an index-linked annuity. This guarantees you an income that rises each year in line with inflation for the rest of your life. The drawback is you will get a lower initial income than if you bought an annuity that isn’t linked to inflation.
Morrissey says: “The comfort of knowing your income will rise every year needs to be balanced with the fact that it will take years before it matches the starting income from a level product.”
Next, look at your other savings and investments. If you have a personal pension like a defined contribution or a SIPP, it’s worth checking that too.
Cash savings are seen as low-risk, but they are at risk of losing money due to inflation. For your cash to beat inflation you need an interest rate that is higher than the inflation rate. That’s not always easy to do. The best protection is to spread your money across a mix of assets, each with different strengths.
In retirement, it’s wise to keep one to three years of essential spending in cash. That way, you won’t need to sell investments during a downturn which can compound your losses.
But cash rarely keeps up with inflation, so you must be on your toes to ensure you get the best return possible. Use cash ISAs to shield interest from tax. You can have more than one ISA, so use a mix of variable rate accounts and fixed-term accounts. You can take the mixed approach with non-ISA savings, if you’ve already filled your ISA.
Fixed-term accounts give you certainty about the rate you’ll get for the period of the account. What you can’t know is what the rate of inflation will be over that time. So it’s hard to tell for sure, but the mixed approach gives you the best chance of staying ahead.
Fixed-term accounts often have a higher rate of interest than easy-access ones. The exception is when interest rates are expected to fall, as then a future lower rate of interest is factored in to the rate you’re getting.
Depending on when and by how much the rate falls, a lower-rate fixed-term account could still be better rate overall than a variable rate one which would have gone down (and possibly by a larger amount) anyway.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, says: “Checking the top-rate savings account tables using comparison sites and keeping abreast of news on interest rate decisions by the Bank of England is a safe way to monitor fluctuations in interest rates.”
“Loyalty does not pay, so checking pots and switching regularly is wise to ensure someone is earning a decent rate on their hard-earned cash and that it’s fighting against inflationary pressures.”
Investments, particularly dividend-paying companies and funds, tend to beat inflation over longer periods of five years or more. That’s because many companies try to increase their dividends over time, helping your income keep pace with rising prices.
Generally speaking, higher-risk investments offer more the potential for growth, but also more potential for losing money. “Making sure that any invested wealth is working hard for you is important whilst also ensuring that this is at a level of risk that you’re comfortable with,” says Bowes.
“Investments do not guarantee a hedge against inflation, although over the longer term, the right investment portfolio should do.”
If you’ve got more than three years of essential spending in cash, it’s worth thinking about investing. On average over time, the stock market offers higher growth than cash savings, which means better protection from inflation – though it does come with more risk.
One low-risk way to earn a little more interest than you can get on a savings account is a money market fund. This is a fund that invests in short-term, low-risk assets like government bonds or corporate bonds from companies with a high credit rating. But your capital is still at risk and, after fees and platform charges, may still not beat inflation.
A fear of the market’s ups and downs might tempt you to stick to gilts or bonds, but these may not keep up with inflation either, says Modray. “Fixed-interest investments, basically IOUs to companies and governments, tend to suffer when inflation is high as when your IOU is eventually repaid, it will be worth somewhat less in the future than today,” he explains.
You can get inflation-linked bonds. These are often known as ‘linkers’ and are government bonds (gilts) specifically designed to provide a return that rises with inflation. “But these only tend to work if you buy them at launch and hold for many years until redemption; buying or selling in between could still see you lose money and lag behind inflation,” Modray adds.
A mix of fixed interest and income-bearing stock market investments will have a higher chance of out-pacing inflation.
Just because you’re approaching or in retirement doesn’t mean all your money should be in low-risk options. A well-balanced investment portfolio can still play a role alongside savings to protect you from inflation.
Even if you’ve already retired, you might well have years ahead of you, so it’s important for your savings not to lose their value. Bowes says: “At its core, financial planning is not just about numbers. It’s about peace of mind. After all, risk comes in lots of different guises – the risk of investment loss but also the inflation risk and this is why people should consider a mix of investments and savings.
“For the decisions that matter most, getting expert advice can be one of the most valuable investments you make.”
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