What impact will rising inflation have on people saving for retirement and those approaching retirement? There are a lot of worried people out there at the moment and it would be useful to understand what impact price rises could have.

Janet

Tom Selby, AJ Bell Head of Retirement Policy says:

The cost-of-living crisis, driven in large part by soaring gas prices, is squeezing people of all ages and incomes.

The latest CPI (consumer prices index) inflation measure stood at 5.4%, the highest level on record, with the pinch felt equally by retired and non-retired households, according to the ONS (Office for National Statistics).

For those in the earlier years of their retirement saving journey, one of the main challenges of inflation will be if it constrains your ability to save in a pension at all.

Sitting down and making a sensible budget is a good place to start as this will help you figure out what you can afford to save for the short, medium and long-term.

Given the various competing demands younger people are likely to have, this could be a combination of ISAs, Lifetime ISAs and pensions. When it comes to retirement saving, your workplace pension – which comes with a matched contribution – is the natural starting point.

You can then look to vehicles like Lifetime ISAs and SIPPs for savings beyond this. Which is the preferable option will depend on your personal circumstances – you can read an in-depth comparison here. 

Younger people who have time horizon running over decades should consider taking at least some investment risk with their fund. If you hold a large proportion of your retirement pot in cash or cash-like investments, these investments will be eroded by inflation over time.

You should, of course, only take risks you are comfortable with, be sure to diversify your investments and understand that while more risk might increase your long-term returns prospects, the price of this will likely be volatility.

Keeping your costs and charges as low as possible is also incredibly important in a world of higher inflation levels.

If you are approaching retirement, you need to consider how you plan to take an income from your pension pot.

Those planning to buy an annuity or cash out their entire pension should consider reducing risk as they get close to their chosen retirement date. Inflation will eat away at the value of your fund as you do this, but this is unavoidable unfortunately.

If you are considering cashing out, make sure you have properly considered the tax implications (you will likely pay more income tax than is necessary) and how you plan to sustain yourself throughout retirement. If you are buying an annuity, you can choose to link it to inflation, although you will get lower rate in return.

If you are staying invested in retirement via drawdown you should review your investments and think about how you plan to generate an income from their fund.

Your investments will likely need to work harder to provide a sustainable income in a high inflation world, but you might be able to keep a reasonable amount of investment risk on the table – particularly if you are planning to drip-feed your income over decades.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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