Inflation: Is your pension safe?

Savers are well aware of the effect inflation can have on their investments but now its pension savers who look set to get the toughest deal.

The news that pensions will be now be linked to the Consumer Price Index rather than the Retail Price Index, as a measure of inflation, has left millions of pension savers wondering why they’re bothering to save at all.

The Government announced the plans last month as part of its budget busting measures to save billions in public sector spending.

Both the CPI and RPI are inflation measures but they come up with different values because there are slight differences in what goods and services they cover. But CPI is generally lower than RPI, making RPI a better index for savings.

So the millions who have been saving into an RPI linked pension are now left looking at a less lucrative retirement because their pensions have been downgraded to an inferior level of inflation protection.

But what can you do to help protect your pension from the effects of inflation?

Contribute more
Saving £100 a month now if you intend to retire in 30 years time may seem like enough but if contributions don’t increase in line with inflation then in real terms your pension fund will be worth a lot less by the time you retire.

Annuities
Although many see an annuity as a safe way to ensure your retirement income they have their drawbacks when it comes to inflation.

Most annuities aren't inflation-linked; you have to pay extra for that, so your fixed income's purchasing power decreases over the years as inflation rises. Even low inflation or a small rise can make a dent in your standard of living over the years.

One way to make sure your income is decent enough to see off any dramatic inflation changes is to shop around and not take the first rate offered by your insurer. This way you could secure more retirement income for your money.

And don’t forget, if you have any health problems or are a smoker you could be entitled to an enhanced annuity which could offer more income based on the assumption that you won’t live as long as someone deemed to be in good health.

Drawdown
If buying an annuity still seems too risky then drawdown is another way to try and work around inflation. Although the risk involved is investing your money, so it’s liable to changes in the stock market, it means you can take a flexible income without being tied into a rate.

But the overall message seems to be that inflation will affect all types of savers and with few measures available to beat it the best option is to research carefully before making an investment in order to work around it.

© Fair Investment Company Ltd