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Whether you’re saving for retirement or have already started taking an income from your pension using drawdown, rising living costs can eat into the value of your pot and your spending power.
Inflation stayed unchanged at 3% in the 12 months to February 2026, although is it expected to rise sharply in coming months due to conflict in the Middle East which has led to soaring oil prices. Read more in our article Inflation holds steady at 3% – for now.
Higher inflation is bad news for pension savers, as the steeper it is, the more it erodes the value of your retirement savings. Here we explain the impact of inflation on your pension, and what, if anything, you can do about it.
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
Saving towards retirement and inflation
If you’re saving into a pension, chances are it’s a defined contribution pension, or money purchase pension, where your contributions (and from your employer, if it’s a workplace scheme) are invested in the stock market and other assets such as gilts, property and cash.
The amount you end up with at retirement is based on the contributions made, and investment performance. The hope is that, over decades, you’ll benefit from investment growth that averages more than inflation over the same time period. However, there will be good and bad years depending on how your investments perform and the wider economic climate, and it’s particularly challenging when inflation is high.
The majority of pension savings are invested in stocks and shares, which over long-term periods tend to provide better returns than cash savings. Most workplace schemes are ‘lifestyled’, which means as you approach retirement, your exposure to the stock market is reduced and your retirement savings are moved into less risky assets. You can learn more about lifestyling in our guide What is pension lifestyling?
However, shares can potentially protect pension savers from inflation as the companies you invest in may be able to increase their prices in response to higher costs, for example, to grow at the same rate or higher than inflation. But this isn’t always the case, and inflation is a major challenge for some investments such as bonds that produce a fixed income.
Whether or not your pension keeps up with inflation depends on the current rate and how your investments perform. If inflation soared again to the levels we saw last year, for example, your pension would have to grow by more than this amount simply to keep up with the cost of living. However, high inflation periods are thankfully usually relatively short term.
For example, let’s say that your pension is currently worth £150,000 and you plan to retire in 10 years’ time, and inflation averages 2% a year. If your pension grows by 4% per year and you continue to pay in 8% of earnings, then it’ll be worth around £203,282 in ten years. But if inflation rises to 4% a year for ten years and your investment growth is 2%, then your pot would be worth £140,626 in today’s money in ten years’ time.
If, however, your pension grew by an average of 5% a year and inflation was 4% a year, then it’d be worth £185,526 in today’s money, and you’d be able to buy more with your money than you could have with your original investment ten years ago.
State Pension and inflation
The State Pension often forms the bedrock of people’s retirement income and is guaranteed to rise through something called the ‘triple lock’ guarantee. This essentially means that each year, the government commits to increase the State Pension by the highest of September’s inflation figure, earnings growth, or 2.5%. You can find out more about this in our guide What is the pension triple lock?
This means that at the start of the new 2026/27 tax year on April 6, the State Pension will rise by 4.8% (in line with May-July’s earnings numbers). So the full new State Pension for those who reached retirement age on or after 6 April 2016, will increase from £230.25 a week to £241.30 a week from April 2026. The basic State Pension for people who retired before 6 April 2016 is currently £176.45 a week, but will go up to £184.90 a week, although the amount you’ll personally get is based on your National Insurance Contribution record.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “With inflation remaining unchanged in September 2025 at 3.8%, it means that average wage data is putting pensioners in line for a 4.8% increase from April.
“However, people on the basic state pension will not receive the full triple lock increase on their entire pension payment. While the base payment rises in line with the triple lock, additional payments such as the additional state pension will rise in line with inflation so those elements will increase by 3.8% next year.”
Defined benefit pensions
If you’re due to receive, or you’re already getting an income in retirement from a defined benefit (final salary pension scheme) this will be a guaranteed amount based on your final salary and the number of years you’ve belonged to the scheme. Defined benefit pensions are becoming increasingly rare, and are usually extremely valuable, as they provide a ‘gold-plated’ income in retirement. Find out more about this type of pension in our guide What is a defined benefit pension?
In theory, if you’re receiving income from a defined benefit pension scheme, you don’t need to worry about inflation because the amount you receive will increase alongside the rising cost of living. However, the promise to increase your pension in line with inflation may be capped up to a certain limit if you are taking benefits from a private sector defined benefit scheme, which is usually about 5%. With inflation now much lower than this you should find your defined benefit pension keeps up with living costs. Public sector defined benefit pensions usually rise alongside inflation, and are not subject to a cap. Find out more in our article How do public sector pensions work?
Your choices at retirement and inflation
If you have a defined contribution pension (which the majority of people do), you’ll be free to do as you wish with your retirement savings. This leaves various options, including pension drawdown and buying an annuity, and whether or not your retirement income increases in line with inflation will depend on which you choose, and how you manage your pension. Read more in our article Your pension options at retirement.
Pension drawdown
Pension drawdown, also known as flexible drawdown or flexi-access drawdown, enables you to leave your pension savings invested once you retire, and draw an income from them when needed. You can also take a 25% tax-free cash lump sum from your pot if you wish, or take this out over several years in retirement. Find out more in our articles What is pension drawdown and how does it work? And Should I take my tax-free pension cash at age 55?
You can decide how and when you take an income from your drawdown pension. Meanwhile, you’ll keep the remainder of your pot invested, and the hope is that future investment growth will beat the rate of inflation. This is why even when you retire it’s a good idea to keep a portion of your pension invested to give your retirement pot the chance to carry on growing in value.
However, your money needs to last for decades in retirement, and therefore it’s important to carefully consider how much you withdraw, particularly when the cost of living is rising and you may need to take out more than before. The main risk is that you end up taking too much money from your pension pot too soon, and if your investments don’t perform well, you could run out of money. Find out more about the risks in our article Should I use my pension to boost my income?
For example, according to investment provider AJ Bell, someone with a £100,000 pension who needs an income of £5,000 a year in addition to their State Pension would run out of money after 37 years before inflation is factored in, and with a return on their investments of 4% after fees. However, if inflation averaged 5% during their retirement, the same pot would run out 19 years earlier with withdrawals increased by 5% to meet the rising cost of living. When inflation is running high, the number of years the same retirement pot would last can be dramatically reduced.
This makes it particularly important to make careful use of the flexibility of pensions these days, and only take what you need from your pot to ensure your savings will last for the rest of your retirement. That’s where the skill of a professional adviser can prove particularly valuable, as they can work on preserving the value of your retirement pot.
Annuities
If you use some or all of your pension to buy an annuity, or income for life, then depending on the type of annuity you choose, inflation may or may not have an impact on your income. There are various different types of annuity. For example, you may choose an ‘escalating annuity’, which means that the amount of income you receive will increase over time to keep up with inflation. Beware, though, that the amount you receive at the start will be lower with this type of annuity as it’s expected to increase over time.
If you buy a ‘fixed annuity’, the amount you receive will not change over time, and you’re likely to receive a higher starting income. However, once you’ve bought an annuity with your pension fund, you cannot change your mind. Some retirees, for example, buy an annuity with a chunk of their pension to ensure they have some guaranteed income to cover basic bills in retirement, for example, while leaving the remainder invested. You can read more about annuities in our article Annuities explained.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “Inflation remained steady this month, but current geopolitical instability means we will likely see it start to rise in the coming months. This will have an impact on everyone, including pensioners, who need to make sure that their pension income is robust enough to see them through inflationary ups and downs.
“Retirees on the lookout for a guaranteed income will find annuities continue to offer good value. The latest data from HL’s annuity search engine shows a 65-year-old with £100,000 pension can get up to £7,644 per year from a single life level annuity, with a five-year guarantee.
“This can act as a solid basis for retirement income alongside the state pension, but it’s important to say that level annuity incomes don’t change over time and what might be a good income now may look sorely stretched during a time of high inflation. Inflation-linked products are available – one that rises by 3% per year can give a starting income of up to £5,781 per year. This is demonstrably lower than a level product, and you do need to consider how long it will take the income to catch up to that of a level product.”
Income drawdown can play an important role in helping retirees manage inflation long term. Ms Morrissey said: “By remaining in the markets, it gives their investments time to grow further, though it’s important to say markets can also be volatile. A flexible approach is important to make sure you aren’t taking too much out and potentially depleting capital.
“Mixing and matching annuities and drawdown could be a great option. You can secure a level of guaranteed income with an annuity and then keep some flexibility when drawing an income from drawdown. You can then consider annuitising in stages, potentially securing higher incomes as you age.”
Holding cash in retirement
It’s important to keep some cash savings aside for emergencies, and generally experts recommend holding around one to three years’ worth of living expenses in an easy access account. Currently, the returns you’ll receive from interest paid on market-leading cash accounts will keep up with inflation, but there are no guarantees that this will remain the case. Even if it doesn’t, it’s still important to have a cash buffer in place for those unforeseen expenses which crop up from time to time.
Dean Butler, managing director for retail direct at Standard Life, part of Phoenix Group, said: “Shopping around for the best rates remains crucial in order to avoid losing returns on savings.
“For those more comfortable with taking on risk, investing can provide the potential for higher long-term returns and, if your finances allow, you might be in a position to take advantage of the current lower market prices, though investing comes with no guarantees. Irrespective of market conditions, pensions remain one of the most tax-efficient ways to save, combining benefits of possible investment growth, employer contributions and tax efficiency making them a compelling option for long-term savers.”
What can you do to beat inflation in retirement?
It’s more important than ever to find all the ways you might be able to increase your retirement income. For example, you might be entitled to Pension Credit, which is a means-tested benefit for pensioners on a low income that tops your income up to a certain level (£227.10 per week for single pensioners in the 2025/26 tax year, and £346.60 for a couple).
Claiming Pension Credit may also give you access to other benefits, such as help with council tax or heating costs, so it’s important to find out if you qualify for this as it’s still a hugely underclaimed benefit. Find out more in our article Pension Credit explained and What’s in store for your pension in the new tax year?
You can receive free guidance from the age of 50 and above from the Government’s Pension Wise service on your choices at retirement. Call them on 0800 138 3944 to book a free appointment, or you can book through their website.
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
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