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Why retirees need to consider the effect of inflation on their long-term income

If you’re retired, understanding how inflation will affect your income now and in the future is important. Find out what steps you can take to improve your long-term financial security here.


As you may know, inflation has been rising at a faster pace than usual. If you’re retired, the effect of inflation can be more pronounced and it’s important to understand how it could affect your lifestyle now and in the future.

The pandemic and its effects on the economy means inflation, or the "cost of living”, has been rising faster than it has in recent years.

The Bank of England (BoE) aims to keep inflation at 2% a year. However, according to the Office for National Statistics, the rate of inflation in the 12 months to January 2022 was 5.5%. While the effect of inflation can seem small day-to-day, it adds up.

Why inflation is important if you’re a retiree

If you’ve already retired, inflation can affect your lifestyle more than if you were still working. This may be because your income is static rather than rising with inflation. You may also need to consider how you will use your assets over your retirement. Taking more now to ensure your income matches inflation could mean you face a gap in the future.

In addition, energy and food are two of the areas that inflation has affected the most.

Traditionally, pensioners have spent a larger part of their income on these two expenditures than workers. So, rising inflation could affect your expenses more than you expect.

While the State Pension will rise in the new tax year in April, it won’t rise at the same pace as inflation. For the 2022/23 tax year, the State Pension will increase by 3.1%. This is because it will rise by the rate of inflation as measured in September 2021.

According to the Centre for Economics and Business Research, the gap between the State Pension increase and the current pace of inflation will mean pensioners are £169 worse off in real terms.

So, if you’re retired, what can you do about inflation?

5 things retirees should do to manage the effects of inflation

1. Review your income needs

Looking at how your expenses have changed over the last few months can help you create a realistic budget. Does your current income still allow you to live the same lifestyle, or have you had to make adjustments? Looking at which outgoings have increased can help you see if you need to make any changes.

2. Check your reliable sources of income

As part of your retirement income, you may have some sources that provide a reliable income. You should review these and check if they’ll increase in line with inflation in the new tax year.

As mentioned above, the State Pension will rise but not at the same pace as inflation. You may also have a defined benefit (DB) pension, which pays a guaranteed income throughout retirement. A DB pension will often increase at the same pace as inflation, providing you with some financial security even as the cost of living rises.

If you had a defined contribution (DC) pension, you may have chosen to purchase an annuity that will pay an income for the rest of your life. When purchasing an annuity, you can choose whether the income will increase in line with inflation.

3. Assess investment performance if you're using flexi-access drawdown

If you have a DC pension, an alternative to an annuity is flexi-access drawdown. This option allows you to take a flexible income, with the rest of your pension usually remaining invested. As a result, the remainder of your pension may increase to keep pace with inflation depending on how the investments perform. It is important to remember that if you take your pension via flexi-acess drawdown, your future benefits will depend on fund growth, when you take benefits, how much you draw and how long you live for.

In addition to investments held in a pension, you may also have a separate investment portfolio that could deliver growth that matches or exceeds inflation.

Investing can provide you with a chance to grow your wealth, but you should keep in mind that returns cannot be guaranteed.

4. Review your cash savings

Having some cash savings is important; they provide a safety net if you face an unexpected cost and can be used to pay for large one-off items like a holiday, a new car or a gift to a child within the next few years. However, as the rate of inflation is often higher than the rate of interest you are earning, the value of your savings could be falling in real terms. So it is advisable not to keep too much in cash.

In some cases, moving the money to a different account or investing a portion of the savings can help you reduce the effects of inflation on your wealth.

5. Arrange a meeting with your financial planner

If you would like help in understanding how inflation is affecting your income now and the effect it could have in the future, a meeting with a financial planner should help. If you are not already a client of Ermin Fosse, please do contact us at to discuss your income needs and what you can do to protect against the effect of inflation.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. Errors and omissions excepted.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

Please contact us before you invest / disinvest.

Ermin Fosse Financial Management LLP is authorised and regulated by the Financial Conduct Authority Financial Services Register No: 197438

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