High inflation has reared its ugly head again after many years of low or virtually nil figures. While this may suit some it is undoubtedly the enemy of the already or soon-to-be retired.
Not only are you confronting the major challenge of soaring prices but you must also protect the future value of your pension pot into future years. The first thing to say is that if you have no private or employer sponsored pension and are or will be reliant on the state pension you should certainly consider doing something about that immediately.
Some Considerations
If you are retiring soon or indeed in the next few years what can you do to protect your pension against future inflation?
1. Hold on to your Pension Pot
If you are retiring at age 65 you could live for another 20 years or more. If you don’t have an urgent need to draw your pension why not consider staying invested beyond your retirement age and start the drawdown only when necessary and timely.
You can stay invested by putting your pension pot into an Approved Retirement Fund (ARF). Do be careful with how you invest the ARF, however. Maybe the old advice that you keep your retirement fund in cash or safe fixed income investments like bonds needs to reviewed given that 20 years is quite a long investment horizon.
Cash or bonds are unlikely to enable you to keep the real value of your money. Don’t be afraid to at least consider alternatives that can help you match or beat the inflation spiral.
2. Avoid Bonds
Bonds such as Government Securities typically don’t do well when inflation is high. Currently, for example, we are looking at the worst bond bear market we have seen in the last 50 years.
In this regard, for conservative investors, one option who wish to stick with bonds is to look at inflation-linked bonds as these can offer some inflation related protection.
3. Consider Multi-Asset Funds
Multi-Asset Funds that are chosen with the correct risk profile for you (whether that be high, medium or low risk) are an option to consider. For the conservative investor with a low risk profile there are Multi-Asset Funds that will provide exposure to investments targeted at keeping pace with or beating inflation without taking on too much risk. Multi-Asset Funds typically invest in a range of different investments such as equities, bonds, property and commodities. Exposure to diversified investments with the appropriate mix to suit your needs should reduce the investment risk you take on and boost your chances of beating inflation.
4. ARF may be a better option
At the point of retirement you will most likely have the option of purchasing an Annuity or investing your pension pot in an ARF.
An annuity contract will basically guarantee a fixed pension for life purchase with the money in your pot. Although the annuity will give you a guaranteed level of income for life you may be shocked by how small the amount of pension your fund will buy. Another consideration is that once you buy an annuity your capital sum is essentially gone.
You may have a better chance of shielding your pension against inflation if you opt for an ARF and you certainly will have a lot more flexibility. You can withdraw money regularly from your ARF to provide you with an income. Just be careful though that you do not do so in a way that risks exhausting your fund.
A further advantage is that the money in your ARF on your death can be left to your next of kin. This may not be the case with an annuity.
5. You may already be covered against inflation
You may be one of the lucky ones and have protection against inflation already built-in to your pension. You may be a member of an employer sponsored Defined Benefit Pension Scheme that has an inflation linked or fixed increase pension provision or, better still, you may be a Public Servant and be a member of a Superannuation Scheme that increase your pension in line with increases in pay.
If you are, be thankful. For the rest good planning is essential.
6. Avail of Independent Professional Advice
There is no magic bullet when it comes to ensuring that you enjoy a comfortable and stress-free retirement. You will need a good adviser to help take you through all of your options. This is what we do so please do contact us to start the conversation.
Statistics show that people are more likely to insure their cars and homes than themselves. They don't seem to baulk at all about insuring their borrowings such as the mortgage on their home, however, insuring themselves has been shown to be much more price sensitive. Perhaps it is the mandatory nature of car, home and mortgage protection cover that makes it so much more acceptable. In reality, however, your life is your most important asset - especially if you have dependants.