How to manage inflation in retirement

Pensions and retirement
Views & insights

Find out what rising inflation means for your income in retirement and what you can do to mitigate its impact.


7 June 2023 | 3 minute read

If you’re retired and drawing an income from your pension, high inflation could be a cause for concern.

You might be wondering whether your retirement income plan can withstand rising prices, and what it all means for your lifestyle and longer-term ambitions.


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Finding ways to reduce the impact of inflation is important for all savers and investors, but for retirees it is critical. Here, we explain some of the ways to mitigate its impact.

Understand how inflation affects you

As a retiree, you probably have a pot of money from which you intend to fund your existing lifestyle and possibly leave a financial legacy for future generations. If rising prices mean you now need to withdraw more income than expected, that pot of money could become stretched. In a worst-case scenario, you could deplete your savings too quickly and be forced to make sacrifices to avoid running out of money.

It may seem very doom-and-gloom, but this isn’t the time to stick your head in the sand. Speaking to a financial adviser with expertise in cashflow modelling will give you a clear picture of how inflation could affect your savings and, importantly, how long they are likely to last. Armed with this information, you can begin to assess whether you need to adjust your financial plans.

Maintain a diversified portfolio

The prospect of further price rises may tempt you to keep more money in cash to pay for your everyday living expenses, and it is important to have a cash safety net to use in the event of an emergency or to plug an income gap.

However, holding more cash than you need is unlikely to be wise in the current high inflationary environment. Although interest rates have risen recently, they remain much lower than the rate of inflation. This means leaving excess cash in a savings account could make it even harder to keep up with rising prices.

The best way to shield your pension from the ravages of inflation is to maintain a diversified portfolio that invests your money across a range of asset classes, including stocks and bonds. History shows that over the long term these asset classes tend to perform more strongly than cash, helping to mitigate the impact of rising prices.

How much money you allocate to each asset class will depend on your individual needs and risk appetite, which a financial adviser can help you with. They will also ensure your portfolio is robust enough to deliver long-term performance, no matter what is happening in the wider economy.

Assess your income strategy

Another way to mitigate the impact of inflation in retirement is to ensure you have a carefully considered income strategy in place. This includes assessing exactly how much income is required to meet your needs today, and then revisiting this over time as your circumstances change.

It also involves knowing which investments to raise money from and when; this reduces the risk of crystallising losses and / or selling good quality investments at an unfavourable time. It is best left to someone with wealth management expertise, who understands which asset classes and sectors tend to benefit in different economic environments.

Structuring your income could also help you save on tax, thereby ensuring more of your money goes towards your lifestyle and goals. This is especially important if rising prices mean your income increases and pushes you into a higher tax bracket. Some steps to consider include taking advantage of your pension tax-free cash lump sum; making tax-free withdrawals from ISAs; and maximising your tax allowances as a couple.

A financial adviser can take a holistic look at your savings and investments and advise on the most tax-efficient way of structuring them in retirement.

Next steps

It’s only natural to feel anxious about the impact of inflation on your retirement income, but there are ways to ensure your plans remain on track. Many of the steps involved can be complex, and that’s where taking some smart advice can help.

An adviser will help you understand what rising prices really mean for you, where to put your money in a high inflationary environment, and how to draw income in a sustainable and tax-efficient way. You can focus on enjoying life today, safe in the knowledge that you have a robust plan in place.

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy.


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