Protect your pension from rising inflation

March 2022

Protect your pension from rising inflation

Inflation. Not a word most of us want to hear, particularly when it is about rising inflation. While it may strike fear in many, it need not spell disaster. With a few well-placed actions, there are ways to protect your pension from rising inflation, whatever your stage of life. The Bank of England’s recent interest rate rise was designed to slow the rise of inflation, and that is one tool in their arsenal. There are others that you can use, and we outline them in this month’s article. For advice specific to your circumstances, please get in touch with one of our independent financial advisers at

What is inflation?  

Inflation measures how the value of money changes. It is calculated by the Office for National Statistics (ONS) using the Consumer Prices Index, better known as the ‘shopping basket’. This shopping basket consists of around 700 popular items, comprising goods and services, that consumers buy in a given year. Considering the rise and fall in the price of these items, the ONS can calculate monthly and annual inflation rates.

The Bank of England sets an annual inflation target, which is what it expects inflation to be in that year. For 2021 that target was set at 2%. However, by the end of the year, inflation stood at 5.1%, prompting the Bank to raise interest rates.

How to protect your pension from rising inflation

When inflation rises, the value of money falls. This will have an impact on any cash, savings and investments. However, when it comes to pensions there are steps you can take to protect your money. These steps will differ, depending on whether you are already drawing down on your pension or not. We explore each in turn.

Already drawing a pension

There are two types of pensions, one of which will be the one you are drawing from:

• Defined benefit pensions

• Defined contribution pensions

For those with a defined benefit pension, inflation is not something you need to worry about. Similar to the State Pension, defined benefit pensions are already linked to inflation. This means that the amount you get will increase in line with inflation. Of course, when inflation falls, that amount will also decrease. However, the important point is that for you the value of money remains fairly constant.

If you have a defined contribution pension, there are a couple of things to consider. Firstly, the temptation is to take out a larger chunk of money and live off that for a while, reducing administration and hassle. However, once you have taken that money out, it is no longer part of an investment. Investments are designed to deal with inflation changes, and it is the financial adviser’s job to ensure that your investment is performing well, whatever the financial lay of the land. Rather than succumb to that temptation, consider taking out less instead. This way, your money remains in its pension investment and therefore more likely to retain at least some of its value.

Secondly, if this is the type of pension you hold, now is the time to review your finances. You want to check that what you are drawing is what you need and that you are not eroding your pension pot too quickly. If you have a budget, review it to ensure that you are getting the most out of your money. Are you still paying off debts that you can re-prioritise or reduce? Could you perhaps get better rates for utilities, or reduce insurance premiums by shopping around? What you are aiming for is to draw down only what you need, allowing the bulk of your money to remain invested and therefore be less likely to be affected by inflation.

Finally, talk to your independent financial adviser about whether an inflation-linked annuity is right for you. Annuities are products that give you a guaranteed income using your pension pot. By linking an annuity to inflation, you may start off on a slightly lower income, but over time that income will level out with inflation.

Not yet retired and still saving into a pension

If you are not yet at retirement age, inflation may be less of a concern although you still want to ensure your pot is growing at or higher than the rate of inflation. That said, it does also depend on how close to retirement you are.

If you are in the earlier stages of paying into a pension, you may be able to take more risks; this will depend on your attitude to risk and financial circumstances. If you are closer to retirement, that risk will reduce substantially in order to preserve what you have built up during your working life.

In either case, when inflation is higher it may be riskier to keep cash than to invest it into a pension. A quick financial review will highlight whether that is that case for you. If you are holding more than six months’ worth of cash, talk to an independent financial adviser about the pros and cons of investing it into your pension instead. Why? Because when you keep cash or savings, their value can erode more quickly with higher inflation compared to holding that money in a pension scheme.

Seeking professional advice

The job of any financial adviser is to make sure that your money is working for you – in the short and long term. This is even more important during more difficult or tumultuous times. At Plutus Wealth we can help you make the most of your money wherever you are on your financial journey. Our independent financial advisers are here to help whenever you need us. Call us on 020 7871 5200 or email us at and we can get to work to protect your pension from rising inflation too.  


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