Many people planning for retirement think hard about how much they need to retire but spend far less time thinking about how that income might hold up once they’re living off it.
A £30,000 income today won’t buy what it does now in 15 years. At 2.5% average inflation, you’d need around £43,500 a year to maintain the same purchasing power.
The decisions you make about your investments, withdrawals and pension structure in retirement will determine whether your income keeps pace with rising costs or quietly shrinks year after year. This blog explains what you need to think about.
Why inflation hits retirees harder than working-age savers
When you’re working, a pay rise (even a modest one) can help offset rising costs. In retirement, there’s no equivalent unless you’ve built it into your plan. Your income is largely fixed, set by your pension arrangements, investments and the State Pension, while your costs keep moving.
Many retirees also tend to hold a higher proportion of their wealth in cash and fixed-income assets than younger savers, often because cash feels ‘safe’. But cash held over a 20 or 30-year retirement is anything but safe from inflation. £100,000 sitting in a savings account earning 2% while inflation runs at 3% loses value every single year, even though the number on your statement keeps growing.
This problem compounds over a long retirement. If you retire at 65 and live to 90, that’s 25 years for inflation to erode your purchasing power; long enough for even modest inflation to roughly halve what your money is worth in real terms.
Certain costs associated with later life, particularly care and healthcare, have historically risen faster than general inflation. So, planning around the headline inflation rate alone can leave you short when it comes to the expenses that matter most in your 80s and beyond.
The State Pension and the triple lock
The State Pension currently increases each year under the triple lock, which is the higher of average earnings growth, inflation (CPI), or 2.5%. It’s one of the few elements of most people’s retirement income that’s explicitly designed to track rising costs.
But the State Pension, currently a maximum of £241.30 a week, covers only a fraction of what most people need for a comfortable retirement. It’s worth checking your State Pension forecast on the Government website to know exactly what you’re entitled to.
The triple lock has also faced political scrutiny in recent years, with various governments raising the prospect of reform given its rising cost to the Treasury. While it remains in place for now, building your retirement plan on the assumption that it will continue unchanged for the next 20-30 years carries big risk. A prudent approach is to treat the State Pension as a valuable, inflation-linked foundation rather than the centrepiece of your retirement income strategy.
You should also check whether you have any gaps in your National Insurance record. Missing qualifying years can reduce your State Pension below the maximum amount. In some cases, voluntary contributions to fill gaps can be worthwhile. This is particularly relevant if you took time out of work for parenting or caring responsibilities, lived abroad or were self-employed with gaps in contributions, as these periods can sometimes be overlooked when checking your entitlement.
Keeping enough invested for growth
Many people instinctively want to de-risk their entire portfolio the moment they retire, shifting everything into cash or low-risk bonds. While this might feel prudent, it can leave you exposed to inflation risk instead of market risk, simply swapping one problem for another.
Money you won’t need for 10 years or more can typically still benefit from some equity exposure, even in retirement. Shares have historically outpaced inflation over the long term, while cash and many bonds haven’t. The challenge is balancing this against the danger of needing to sell your investments for income during a market downturn early in retirement, which can permanently damage your overall pot’s ability to recover.
A common approach is splitting your pension into pots with different timeframes, with enough cash and lower-risk assets to cover the next two to three years of withdrawals and the remainder invested for growth to fund later years. This lets you draw a stable income without being forced to sell investments at a low point, while keeping enough of your money working to outpace inflation over the long run.
Annuities and inflation-linked options
A level annuity pays a fixed income for life, which can feel reassuring at the outset but can steadily lose its real-terms value. An inflation-linked annuity rises each year in line with inflation, but starts considerably lower, sometimes 30%-40% in the early years, to fund that future protection.
Whether this trade-off makes sense depends on your other income sources and how long you expect to live. If you have other inflation-resistant assets to draw on, a level annuity combined with flexible drawdown elsewhere might suit you better than paying the upfront cost of inflation-linking the whole amount. Annuity rates and terms tend to vary significantly between providers, so it’s worth comparing more than one quote before committing, as annuities are usually irreversible once purchased.
Reviewing your drawdown rate
If you’re using drawdown rather than an annuity, the common guidance is to withdraw 3%-4% of your pot annually to make it last. But applying this rate once and leaving it untouched is a mistake. Inflation can change what you need to withdraw to maintain your lifestyle, while market performance will change what your pot can sustainably provide.
In a year of strong investment growth, you might have scope to increase your withdrawals in line with rising costs. In a year where markets have fallen, drawing the same inflation-adjusted amount could deplete your pot faster than planned. Reviewing your withdrawal rate at least annually, alongside your investment performance and inflation, will help you adjust your approach before problems arise.
Diversifying beyond pensions
Pensions aren’t the only tool for inflation-proofing your retirement income. ISAs offer tax-free growth and withdrawals. Unlike pensions, withdrawals don’t affect your Annual Allowance, giving you more flexibility in how you structure your income.
Property, whether your own home or a buy-to-let, has historically provided some protection against inflation, though it can come with its own costs and issues.
Holding income across several pots, pensions, ISAs and other investments can give you choices about where to draw from each year. This matters for tax efficiency as much as protecting against inflation. Drawing more from your ISA in a year when you need extra income can avoid pushing your pension withdrawals into a higher tax bracket, while keeping your overall income on track.
Don’t overlook protection and later-life costs
It’s easy to budget for retirement based on today’s cost of living and assume it will hold roughly steady. Care costs are an exception. The average weekly cost of residential care in the East Midlands is around £1,146, and this figure has, historically, risen faster than general inflation. Building some allowance for rising later-life costs into your plan, rather than assuming your current budget will stretch indefinitely, can help you avoid a difficult adjustment later on.
Healthcare costs outside the NHS, such as private treatment, dental care or mobility aids, also tend to rise faster than wages over time. Many people find their healthcare spending increases significantly in their 70s and 80s, just as their income from pensions and investments starts levelling off or declining in real terms.
It’s also worth reviewing whether you have adequate protection in place heading into retirement. Some people cancel their life insurance once their mortgage is paid off, which may be appropriate. But it’s worth checking this against your current circumstances rather than assuming your old arrangements still fit. If you have a spouse who depends on your pension income, or want to leave a legacy for your family, maintaining some cover into retirement might still make sense, particularly where Inheritance Tax planning is a consideration.
A periodic review of your protection needs, alongside your investment and withdrawal strategy, can help ensure nothing is left exposed as your circumstances change.
How can Glenrose Financial Planners help?
Protecting your retirement income from inflation isn’t a single decision made at the point of retirement. It’s an ongoing process of balancing growth and security, reviewing your withdrawal rate, and structuring your pensions, ISAs and other assets to work together.
At Glenrose, we can build resilience against inflation into your retirement plan from the outset, helping you decide how much to keep invested for growth, whether an annuity or drawdown (or a combination) suits your circumstances, and how to structure your withdrawals across different pots in the most tax-efficient way. We’ll review your plan regularly, adjusting as inflation, the markets and as your personal circumstances change, rather than leaving your plan to run unchecked for years.
Book a consultation with one of our advisers to discuss how we can help protect your retirement income for the years ahead.