Living on a fixed income, like a pension, when inflation is high can be challenging. Everything is costing more but the money you have coming in each month is often the same.
During periods of economic uncertainty, it’s a good idea to look again at your retirement plan, and consider if you need to make any adjustments.
Here are five good ways to protect your pension income from increases in the cost of living:
1. Retire later
- Waiting a bit longer than you planned to retire can mean you avoid retiring at a time of high inflation. This can protect your pension pot from the negative impact inflation has on stock markets. High inflation can upset stock markets and may make the value of your pension investments fall.
- Withdrawing money from your pension while stock markets are falling can leave you much worse off than taking a pension income when markets are less volatile.
2. Use up ISAs first
- If you have alternative pots of money to draw on, like cash ISAs, for example, they can act as a good backup source of income. Drawing on your cash ISAs for your retirement income for a short while, instead of your pension, allows time for the stock markets to grow again and creates an opportunity for your invested retirement pot time to recover at the same time.
- Inflation slowly erodes the value of money, such as cash savings left in the bank, which means its buying power is reduced.
3. Withdraw less
- Reducing how much you withdraw from your pension may sound strange in a cost of living crisis. But doing so can help your pension grow in the long run. Withdrawing less from a pension each month means keeping more of it invested. This gives it a better chance to grow more than the rate of inflation, keeping your savings growing at a similar rate to the cost of living.
4. Stay invested
- It’s important not to panic if you see the value of your pension investments falling. Markets normally go up and down over the months and years. Typically the worst thing you can do is to sell out of your investments when markets are falling.
- It’s usual for people to move their investments into less risky assets as they approach retirement, thinking this will keep their pot safe. But people are living longer. To make a pension pot last longer throughout perhaps a 30 year retirement, it needs to stay invested in assets that are more likely to increase in value.
5. Add to your pension
- Falling stock markets are not all bad news. Many investors see this as an opportunity to buy more assets at lower prices. If you are able to, it can be worth considering whether now is a good time to top up your pension pot, to give you more later on, or to make your pot last longer.
