How to inflation proof your retirement income

Consumer Prices Index (CPI) inflation rose by 3.4% in February 2024. And as the rate of inflation stays elevated, those in retirement could be hit the hardest. If prices go up but your income doesn’t, it could mean your standard of living slips.

It’s important to remember that your retirement could last 30 years or longer, so inflation could significantly reduce your enjoyment and peace of mind if you don’t take precautions against its effect. If your income stayed the same in that time, and inflation was just 2% a year over the same period (the Bank of England target set by the government), this would almost halve what you could afford in 30 years’ time.

Thankfully, there are ways to help try and inflation proof your retirement income.

This article isn’t personal advice.

What you do with your pension is an important decision. Get guidance or ask for personal advice if you’re unsure. The government provides a free and impartial service to help you understand your retirement options – more on Pension Wise.

How to plan for inflation in your retirement

1. Check if you’ll get automatic inflation protection

The State Pension, often the backbone of people’s retirement planning, is usually protected against inflation by the ‘triple lock rule’. This means your State Pension income will increase by the higher of inflation, earnings growth or 2.5%. This means pensioners are in line for an 8.5% increase from April 2024.

MORE ON STATE PENSION RULES

If you have a defined benefit (DB) pension, like a final salary scheme, you could also benefit from an automatic increase. The income you’ll get will normally go up in line with inflation or by a fixed percentage. You can check if you have a DB pension by contacting your current and any previous employer or pension provider.

2. Consider buying an annuity

If you have a personal pension, you can choose to swap some, or all, of your pension for an annuity and in return you’ll get a secure income for life.

You can normally choose for your income to increase each year, either by a fixed percentage (normally 3% or 5%), or by linking it to the Retail Prices Index (RPI). Choosing one of these options means your starting income will usually be lower, but better protected against inflation.

Because of how annuity providers generate returns, any interest rate rises can lead to better annuity rates. But the right time to buy an annuity really depends on your circumstances.

A good time to consider buying an annuity could be when you give up work completely. You’ll no longer have a steady income stream from earnings to cover your essential bills. An annuity can help plug this gap.

To find out how much annuity income you could get, you can use our online annuity tool to get a free quote. There is no obligation to buy an annuity after getting the quote. Don’t forget to confirm health and lifestyle details, like your height, weight and how much alcohol you drink. It could mean you qualify for even more income which you can protect against inflation.

GET AN ANNUITY QUOTE

Once set up, an annuity can’t usually be changed or cancelled. It’s important to make sure you understand your options, including how much income your spouse or partner would receive on your death, before you apply. Quotes are guaranteed for a limited time and annuity rates can change and could go up or down in future.

3. Keep your pension invested – but this isn’t guaranteed

If you’re looking for a more flexible way to take money from your pension, you can choose to keep your pension invested. Some pension providers (like HL) allow you to move your pension into drawdown or take lump sum withdrawals.

With these options, you can keep your pension invested. This means your fund value and income from investments could potentially increase during your retirement, and in turn offer the potential for your income to keep up with inflation.

The risk is that the opposite is also true. All investments and any income they produce can fall as well as rise in value so you may not get back what you invest, and your income could fluctuate.

What happens will depend on how your chosen investments perform and how much you withdraw, so it’s important to have a well thought out strategy.

You could consider adopting a natural income strategy. This is where you withdraw no more than the yield generated by your investments. This is a good way of making sure your pension remains robust over the long term.