Inflation: Mansfield resident says we're 'living in fool's paradise'
We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info
A money expert has warned “pensions aren’t immune from the effects of inflation” amid today’s worrying inflation rate news. Rising inflation means costs of goods have risen, while incomes relatively have fallen.
Makala Green, a chartered financial planner, told Express.co.uk: “Historically, pensions usually grow faster than inflation, but pensions aren’t immune from the effects of inflation, both when saving and while taking an income in retirement.
“Most pensions are inflation-linked, meaning they aim to rise in line with inflation.
“However, with inflation at record levels currently 5.4 percent (CPI), many pensions will have difficulty keeping pace.
“How inflation impacts pensions and pensioners will depend on the type of pension they hold.”
Here’s how those contributing towards retirement may be affected and how they can mitigate any negative repercussions:
“For those contributing, there are two types of pension contributions,” Makala explained.
“Level, where the contribution remains the same and does not factor in inflation, and Inflation-linked contributions, meaning your pension aims to keep pace with inflation.
“Therefore, your contributions will likely rise on an annual basis to reflect any changes. Ideally, with inflation rising so high, it’s worth having an inflation-linked option, so the money in your pension keeps pace and maintains some value, although this is not guaranteed.”
Nationwide to offer free AA breakdown cover [BANKS]
State pension: Britons find their National Insurance contributions don’t count [WARNING]
NS&I: Green Savings Bonds’ interest rate slammed [PAY OFF]
If you are drawing out money from your pensions, how may you be affected and how can you mitigate any negative repercussions arising from increased inflation?
Makala said: “If you’re taking income from a final salary pension scheme (provides a guaranteed income), there is little to worry about as the amount you get increases with inflation, just like the state pension.”
However, this is not the case for company and personal pensions.
Makala explained company and personal pensions “where income is not guaranteed, are most pensions these days.”
She said: “When inflation is high this can affect investment returns, and the value of your money can be at risk of inflation if not inflation-linked.
“Many pensions average for pension increases of two percent per year; however, the current inflation has more than doubled this, meaning the value you receive if taking a pension will be much less, and you will not be able to buy as much.”
Makala went on: “For those drawing or about to draw a pension, you have the option of opting for or converting your drawdown pension to an annuity (a financial structure that gives you a guaranteed income for the rest of your life) that can link to inflation.
“That way, you have protection against any ups and downs. However, annuities may mean less money and flexibility.”
Follow Makala Green on Instagram at @TheWealthCheck and check out her website www.makalagreen.com.
Source: Read Full Article