The Impact of Inflation on Pensions

The Impact of Inflation on Pensions

The Impact of Inflation on Pensions

As we enter 2024, UK inflation is trending downwards, with the latest figure for November coming in at 3.9%. It’s easy to forget that this time last year, UK inflation stood at more than 10%, having hit a 41-year high of 11.1% in October 2022. While still some distance from the Bank of England’s target rate of 2%, it is undoubtedly an improvement from 12 months ago. 

We have seen a considerable increase in the cost of living over the last couple of years, but how will inflation impact your pension assets?


Relative spending power

At the core of the impact of inflation on everyday finances is relative spending power. If inflation is 10%, then goods that would have cost £100 last year will now cost £110. Consequently, your relative spending power has decreased, which can significantly impact your finances over a prolonged period. So, how does this affect your pension assets?


Pension contributions

In a perfect world, your income (salary) would increase in line with inflation and your contributions, as a percentage of your income, would maintain the relative spending/investment power of your pension contributions. Unfortunately, during the recent difficult times, salary increases did not match inflation for the majority; therefore, their contributions have been falling in relative terms. 

As a general rule of thumb, many people will look to increase their pension contributions in line with their salary. It can be helpful to consider pension contributions as a percentage of your salary instead of a set cash figure.


Pension returns

The return on pension assets and pension contributions are matters you should discuss regularly with your financial adviser. In periods of high inflation, there are several issues to consider about investment returns:-

  • High inflation will place pressure on company running costs, profit margins and, ultimately, returns.
  • Reduced returns for companies will impact their valuation on the stock market and the value of your pension investments.
  • For fixed-interest investments, while there is a degree of security regarding income, the relative return will be negative unless this is higher than inflation.

When in retirement, unless you can increase your pension payments in line with inflation, again, your spending power is falling. You would need to find additional funds from elsewhere to make up the shortfall or draw down more income from your pension scheme, impacting the value and returns on your long-term pension assets.


Impact on retirement savings

While UK base rates are now at 5.25%, over the last few years, they were as low as 0.1% for a prolonged period. Consequently, those with savings faced 0% interest on their accounts while inflation was double-digits. Similarly to the above comments, as the cost of living continues to rise, relatively low interest rates mean that spending power is being eroded year by year. While more recently savings rates have increased in line with the base rate, instant access rates are still relatively low, although there is the opportunity to enhance returns using fixed-term arrangements. The knock-on effect of sub-inflation savings rates can be significant, reducing the expected longevity of your savings and often prompting a rethink and realignment of your finances and long-term aspirations.



Unless your income, pension contributions, and savings rates can maintain parity with inflation, your overall spending power is constantly being eroded. As we have seen, this has forced many people to rethink their retirement plans, returning to work or taking on part-time roles. While relatively short-lived, the impact of high inflation will be felt by many saving for retirement and drawing down funds from their pension plans in retirement.

Reviewing your overall investments regularly and looking at income, assets, and long-term retirement plans is essential. If you would like to discuss your pension arrangements in more detail, please contact us, and we can review your options.

Posted in Pensions