Inflation falls but still stubborn: how to safeguard your retirement income

In the lead up to today’s UK inflation data, it was believed that price rises had sped up again, with rocketing fuel prices considered the main culprit. But in a welcome twist, it’s been confirmed that the UK Consumer Prices Index fell from 6.8% to 6.7% in August, the sixth consecutive month that price rises have slowed.

Year-on-year food inflation was the biggest faller last month, although at 13.6% it remains painfully high. In contrast, soaring petrol and diesel prices kept inflation raised, and with global oil prices recently hitting their highest level in 10 months, there is little sign of this abating.

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In a statement this morning, Chancellor Jeremy Hunt said: “Today's news shows the plan to deal with inflation is working - plain and simple. But it is still too high, which is why it is all the more important to stick to our plan to halve it so we can ease the pressure on families and businesses.”

As Hunt noted, while inflation has continued to ease, we are not out of the woods yet. Inflation remains a big problem on these shores.

On Tuesday, the Organisation for Economic Co-operation and Development (OECD) revised up its 2023 forecast for UK inflation from 6.9% to 7.2% - the highest of any advanced economy.

This means that price rises in the UK will outstrip those in Germany, Canada, France, Italy, Japan, and the US. The UK economy is also expected to be the second-worst performer in the G20 - a group of the world’s largest economies - next year. Only Argentina and Turkey are predicted to fare worse.

The Bank of England (BoE) has an inflation target of 2% but doesn’t expect a return to this level until early 2025. UK inflation is set to average 2.9% next year, according to the OECD, a marginal uptick on what the think tank predicted in June. Whether it will revise its estimate in response to today’s news is unclear.

How might this influence interest rates?

It’s a big week across the globe for interest rates, with central banks in the UK, the US, and Japan all set to make policy decisions in the next few days.

As the relationship between inflation and interest rates is intrinsically linked – when inflation is high, interest rates typically follow - today’s development may play into the Bank of England’s thinking when its Monetary Policy Committee (MPC) announces it decision tomorrow.

However, the MPC is still expected to hike the base rate for the 15th consecutive time, with a 0.25 percentage points increase to 5.5% the most likely scenario. If this comes to pass, it will push interest rates to their highest level since December 2007.

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According to many experts, this may well be the final hike of the cycle. Mervyn King, a former governor of the Bank of England, claimed yesterday that interest rates are “in the right ballpark now”, hinting that future rises may be unnecessary.

What is stagflation?

A prospect that has crept back into focus in recent weeks is stagflation. But what is it?

Well, it can happen when an economy faces a perfect storm of high inflation, low growth, and high unemployment. It leaves central banks in a bit of quandary, as hiking rates to dampen inflation might inflame job losses.

The last time stagflation occurred was in the 1980s, but fears have bubbled away for the best part of a year now that it might rear its head once again.

Some commentators have urged central banks to keep increasing rates in a bid to ward off stagflation - most notably, Nouriel Roubini, known as “Dr Doom” for accurately predicting the 2008 financial crisis years before it happened.

Others, however, don’t believe aggressive rate hiking is the right approach. Nigel Green, chief executive of deVere Group, a global financial advisory and asset management firm, said: “Crushing already slowing global economic growth through the blunt instrument of monetary policy will be significantly more detrimental to an economy than short-term stagnation. 

“While neither extreme is ideal, hindering longer-term economic growth is the real danger, not short-term stagflation, and it should be the focus for policymakers.”

How can I protect my retirement income from inflation?

The latest inflation development may still prove a bit unsettling for savers and investors, particularly those in retirement. While price rises are slowing, they continue to increase at an alarming pace.

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Since inflation began to surge in late 2021, retirement portfolios have come under the cosh, and if the OECD’s predictions are anything to go by, this is set to continue in 2024, too.

With another base rate rise seemingly imminent, and higher inflation promising to stick around, now might be a good time to check that your retirement savings are geared up to meet your later-life income needs in the months and years ahead.

Here are five simple steps you can take to protect your retirement income from inflation.

1) Diversify

When things are uncertain, it’s prudent to make sure you haven’t put all your eggs in one basket. Spreading your investments across different asset types in different parts of the world means you’ll be less reliant one asset to perform for you. To show how diversification works in all its glory, check out this article by ii’s Lee Wild.

2) Keep a cash buffer – but not too much

This may sound counterintuitive as holding cash can prove a drag on investment performance. But having two to three years in accessible cash (either inside or outside your SIPP) to dip into should markets perform poorly can protect you from threats such as sequencing risk.

This can occur if you continue to make withdrawals from your pension pot when share prices are low as it can affect how quickly your portfolio recovers once markets rebound. For example, if the share portion of your SIPP falls 20% from £250,000 to £200,000 and you continue to take £10,000 a year, the rate of withdrawal will increase from 4% to 5%. This increases the likelihood of your pot depleting faster, especially during your early retirement years. Leaving shares untouched and using your cash buffer can protect you here.

3) Turn to other sources of income

When it comes to funding your retirement lifestyle, the key is to make use of all your assets, and not just your pensions. During some periods, it can make more sense to reduce income drawdown payments, and turn to other areas of your portfolio, such as ISAs. As ISA income is free from tax, you get to keep more of the income you receive, plus you get to preserve your pension pot, which can help it last for longer.

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4) Review your charges

This also might be a timely juncture to look under the bonnet of your portfolio and check that you’re not paying over the odds in fees. This applies to the platform(s) you use, any funds or investment trusts charges, and trading costs, In the same way that tax can eat into your returns, charges can too.

5) Try not to panic

The final tip may seem a bit of a cop out, but when seeking to make your retirement income last, sometimes the best approach is to stay calm and ride things out. It’s best to avoid making short-term decisions which could impact your long-term future, and keep you gaze on the bigger picture. If you focus on the tried-and-tested stuff listed above, your portfolio should be fit to weather the storm.