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How to protect your retirement from inflation
Whether your're still saving or approaching retirement, you can still protect your income from the ravages of inflation.
by Michelle McGagh on Nov 16, 2012 at 12:57
A hike in inflation not only means that day-to-day living is more expensive, it also has a detrimental affect on our retirement savings. Here’s how you can protect your money whether you’re still saving or coming into retirement.
Annual inflation, measure by the consumer price index (CPI), has risen again to 2.7%, meaning Britons have to find an extra £24.5 billion a year to maintain the standard of living they enjoyed 12 months ago, according to MGM Advantage.
For each household, working or retired, that’s another £932 a year to find to make sure the standard of living doesn’t slip.
It is hard enough for working families to find extra money when pay rises and jobs are in short supply, but it’s even more difficult to find extra cash when you’re retired.
Aston Goodey, distribution and marketing director at MGM Advantage, said: ‘The rise in inflation will continue to put financial pressure on households across the UK, and we have yet to see the impact of the recent increases in energy prices feed into the figures. Although the increase has been attributed to the impact of tuition fees, for those people in retirement living on fixed incomes the pressures on food and transport costs are being felt every day.
But don’t fret, there are steps you can take to minimise the impact of inflation, while you keep your fingers crossed that the Bank of England manages to bring inflation down to its target of 2%.
If you’re still saving for your pension
In short, the answer to beating inflation is, save more and invest in riskier assets that can offer a higher return.
James Norton, director of London-based Evolve Financial Planning, said savers had to be brave and take a level of risk with their pension investment if they want to save enough for a comfortable retirement – and the earlier you start saving the more risk you can take.
‘Young savers need to have risk in their portfolio – exposure to real investments and asset classes like equities [or shares]. Equities have not performed well over the last 10 or 15 years but if you want to beat inflation that is the where you have to be invested,’ he said.
‘For those who are a little risk averse you can still have an element of fixed interest but if you do not take any investment risk you are not going to make money on your pension.’
Norton said equities should make up the majority of pension investment until around 10 years before retirement, when the allocation of the pension should more to safer investments such as bonds and gilts, which produce a fixed interest.
Although he added that the 10-year shift would ‘depend on the circumstance of the person and how they will draw an income from the pension’.
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