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What’s going on?! We’re breaking down the Inflation Situation

Inflation is becoming increasingly difficult to predict. Earlier this week (18th October 2023), despite predictions that inflation would drop slightly, rates remained at 6.7%.

Indeed, the unpredictability of inflation can make planning for the future more challenging than it should be. And planning for retirement is no exception.

However, MPE’s own research found that 57% of UK adults with a pension understand how higher inflation and rising interest rates affect their pension. And this is just what we’re hoping to shed some light on…

A deeper look

Inflation measures how quickly prices of goods and services are rising over a period of time. It’s a broad measure. It includes the prices of pretty much everything, from food to petrol and your gas and electric bill. For example, in early 2021, the war in Ukraine influenced gas prices due to a mixture of sanctions, sabotage and supply restrictions. This drives up energy bills exponentially, resulting in inflation reaching double figures.

While inflation seems to have slowed, stubborn food and fuel prices keep inflation at uncomfortable rates. Inflation is also closely linked to interest rates. So, as inflation rises, interest rates are usually increased as well.

The Government has pledged to bring inflation down, but no quick fix is available. Inflation is hard to control because the ways to fight it, such as higher interest rates, take time to affect the economy. With that being said, only 23% of people have confidence that the Government will hit its target of bringing inflation down to 2% by the end of 2023.

What does it mean for you?

In simple terms, the higher the general living costs are, your money won’t go as far as it used to. The same can be said about the value of long-term savings. Even with interest rates rising, the rate of inflation means that some savings can still go down in value.

This can seem very unfair for pension planners. After working and saving hard throughout their career, they may still feel that a comfortable retirement might be out of reach. According to our research, a mere 31% have the confidence that they will retire with enough to achieve their desired lifestyle.

Worrying about inflation can take the joy out of retirement planning – and that’s not fair. Retirement is an exciting time when you can dedicate your time to doing exactly what you want.

That said, there are steps which can be taken that might help to ease your concerns.

Are Inflation-proof pensions possible?

It would be misleading to say that you can completely inflation-proof your pension. However, there are steps you can take to give your savings a push in the right direction.

If you review your current pension scheme, you can see how hard your money is working. If you feel it could be doing more, this could be the time to explore alternative investment options with a higher risk. Of course, riskier schemes present a higher potential for loss, as well as the potential for stronger returns on investments. You may want to diversify your investments, as historically, some diversified portfolios have performed well during high inflation periods.

Of course, knowing if this is an option for you or even where to start can be tricky. For example, before making any investment decisions, it is important to understand your risk appetite (i.e. how much risk you are willing and able to incorporate into your financial plans).

So, it’s always best to seek financial advice before making a decision. For example, our team of advisers at My Pension Expert can help you understand your current financial situation and how it could impact your financial future. From there, we can give personal recommendations as to which option would best suit your needs and help you to achieve the retirement you want.

Inflation and financial planning can be overwhelming, and everyone’s financial situation is unique. However, taking stock of your current situation and seeking advice can help to strengthen your future finances. And this can give you some much-welcome peace of mind in unpredictable economic circumstances.