Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

INFLATION hurts all investors, but it is those with an eye on retirement who may be the most concerned right now.

The money they invest via a pension may soon be needed to secure their income in retirement and the rapid price rises we’re seeing is taking a big bite out of stock markets. The US market, as measured by the S&P 500, dropped 4% on Wednesday alone thanks to inflation fears.

Those already in retirement face the double hit of higher living costs and a hit to their income prospects as asset prices fall.

Here’s how inflation is having an impact an impact on retirement plans in the short and long term

If you’re still saving

Those with some time to go before they retire may be looking on in horror as the value of their pension moves downwards but, in reality, they have the least to fear from inflation. With time on their side, the price falls we’re seeing have time to potentially recover, while lower prices on shares and bonds now mean regular contributions can at least buy assets for less.

Maintaining contributions into a properly diversified mix of assets, including those with the potential to keep pace with inflation should be the plan.

If you’re close to retirement

If retirement is part of your plan within the next few years, it’s crucial to reassess your retirement options to ensure they’re on track, factoring in the higher cost of living.

Deciding exactly how you plan to take retirement income is important - you can read more on your options here - because, ideally, your plans should allow you to cover the cost of essential spending with income that can rise as prices rise. That could mean using some or all of your pension pot to buy an annuity that offers some protection against inflation, or leaving pension money invested via drawdown in assets that have the potential to keep pace with higher living costs.

If you plan on buying an annuity

Annuities take your retirement saving and turn them into a guaranteed income. With prices rising this quickly, however, the value of the income paid by annuities stands to fall in real terms. You can mitigate this to an extent with an annuity that pays an income linked to inflation - but that comes at a cost.

For example, based on rates from the start of May, a healthy 65-year-old would be able to find an annuity paying a rate of 5.753%. But that income would not rise with inflation and, at current rates of inflation, would fall rapidly in value in real terms.

To secure an income that rises with RPI inflation, the rate sinks to just 3.088%.

If you plan on leaving your money invested

Many will plan to leave some or all of their pension savings invested in retirement, and take income via drawdown or via lump sums. Recent stock and bond market falls will have reduced the value of their pots, as well as the real income they can expect.

Effective retirement planning should include building in a cash reserve that can be used to supply income in the short term, so that invested assets have the chance to recover losses over time. There’s no guarantee that will happen but the longer you can resist selling invested assets, the better chance you’ll have of being able to smooth out market ups and down.

Investments need to be spread across a range of assets, some of which can provide regular income but also some that have growth potential. Assets that provide a fixed or regular income - such as bonds and dividend paying stock - may suffer if inflation remains high because the income they pay is eroded. So, you need some assets that can provide a return via asset price growth as well.

If you have existing pensions

It can make sense to bring existing pensions - including those from previous employers - together to help you keep tabs on them and plan your pension investments. However, it’s also really important that you do not give up any valuable protections against inflation that old schemes may offer.

That’s particularly true of defined benefit schemes, where your income is based on your years of service rather than the performance of assets held in the scheme. Many schemes offer an income that rises partially or wholly with inflation.

Even some defined contribution schemes - where your contributions are invested - may offer inflation protection via guaranteed annuity rates. These protections are especially valuable when inflation is rising this fast.

Get some help

Planning your retirement options isn’t straightforward - but there are resources to help you do it.

The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at or over the telephone on 0800 138 3944.

Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028).This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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