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5 ways pension investors can deal with inflation

April 20th 2010

1. Increase your pension contributions every year.

If you don’t keep increasing the amount you pay into your pension every year, then over time your regular savings will diminish in value. It takes a little over twenty years for a sum of money to halve in value at typical rates of inflation so it’s important to keep increasing the amount you save every year.
2. Review your savings every year.
It is a good idea to review your pension at least once a year and perhaps more frequently to make sure that it is on track, whatever your investment strategy. This means looking at the amount you have paid in over the past year, relative to your income and to your overall financial position. It also means looking at your investment choices and fund performance.
3. Invest in real assets.
You can just keep your pension in cash for 40 years, but it is unlikely to be a rewarding investment strategy. Investing in a portfolio which includes real assets such as shares, property and commodities is more likely to produce inflation-beating investment returns over the long term than sticking with cash and fixed interest investments such as Gilts, however they will go down as well as up in value.
4. Buy an increasing annuity at retirement.
You can use your pension fund to buy a level income at retirement. This means that inflation will slowly reduce the spending power of your retirement income. An alternative is to buy either an inflation linked annuity, which automatically increases with inflation, usually the Retail Price Index (RPI), every year, or a fixed increase annuity which increases by a set amount every year, typically 3%. At the moment, the fixed increase annuity looks better value than the RPI linking, for which insurers are charging a hefty premium. A 65 year old man with £100,000 could currently buy an RPI linked annuity of £4,109, or a 3% annuity of £4,862.
5. Income drawdown / Investment linked annuities.
If you are happy to take on some investment risk, then you could opt for one of the variety of ‘asset backed’ retirement income plans such as income drawdown and investment linked annuities. There are too many to list here, all with their own particular investment, income and guarantee options but the basic principle is that you continue investing in real assets into retirement to provide you with investment growth to offset inflation. It is important to remember that taking on investment risk in retirement is not suitable for everyone.