With inflation, or the increase in the cost of living, reaching 5.4% in December, its highest level in 30 years, personal pension providers are being told to send warnings of its impact to customers with large amounts sitting in cash.

The financial regulator the Financial Conduct Authority (FCA) published proposals last week stating that providers of personal pensions and self-invested personal pensions (SIPPs) will be required to send warnings to customers who hold more than 25% of their pension in cash for more than six months.

The move is intended to force providers to give more information to customers who haven’t taken professional financial advice to manage their retirement pot. Alongside these requirements, providers will also be required to offer a readymade, or ‘default’ investment option to people opening a personal pension. This way, they may be encouraged to invest their money into a simple fund, with the pot automatically moving to less risky investments as they approach retirement.

The FCA said:

“Currently, consumers buying and saving into a non-workplace pension have to choose their own investments from an increasingly wide range of options. This complexity can make it hard for some consumers who do not take advice to choose investments that meet their retirement needs. They may end up with investments that are not appropriately diversified and with too much or too little risk. In addition, more consumers are now buying non-workplace pensions without advice.”

“As well as poorly chosen baskets of investments, we are concerned that some consumers hold cash in their non-workplace pension. Over the long term, cash holdings are at risk of being eroded by inflation. Investing in growth assets rather than cash is likely to deliver a larger pension pot at retirement.”

Hundreds of thousands of personal pensions and SIPPs are opened by pension savers without taking advice every year. For example, those savings into personal pensions include the self-employed, anyone without access to a workplace pension scheme, people wanting to combine their pension pots into a single account, and those wanting to supplement their other savings.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said:

“While people might have a significant cash holding in their pension for a specific reason, others may have little idea and be oblivious to the damage a significant long-term holding can have on their retirement planning.”

“They could miss out on investment returns that would build their pension pot and we would also see inflation taking a large bite out of its purchasing power over time. These warnings could act as a real wake up call to people previously unaware of their position and prompt them to take action to safeguard the value of their pension.”

At present, the personal pension market consists of around 13m accounts, and a total of about £470 billion in retirement savings.

By contrast, employees saving into workplace pensions are already placed into a so-called ‘default fund’ unless they actively choose another option, with limits on how much they can be charged. You can find out more about this in our guide Where is my pension invested?. The requirement for personal pension providers to offer a default fund option will bring their accounts more in line with workplace schemes, but the choice still lies with the investor. Personal pension savers can still choose where to put their money.

How does inflation affect your pension?

The impact of high inflation can dramatically erode the value of pension savings over time, particularly if a large proportion of your retirement savings is sitting in cash earning below-inflation interest rates. This could mean you struggle to make ends meet when you retire.

A key way to stay on top of whether your pension fund is beating inflation is to monitor the investment performance of your funds, and if they aren’t meeting the returns you would like, it may be worth exploring other investment options. For more information on this, have a look at our article What does inflation mean for my money?.

Where to seek further help

If you would like further help on how to manage your pension savings, the Government’s Pension Wise service provides people aged 50 and above with defined contribution pensions free guidance on their pension choices at retirement.

But if you want professional financial advice, you’ll need to speak to a financial advisor, as Pension Wise can only provide general guidance and not individual recommendations. Find out more in our articles How to find the right financial advisor for you.

Alternatively, if you think you might be interested in speaking with a pensions expert, Rest Less Financial Services is now offering our members a free Pension Health Check with a Rest Less Pensions Expert.

Do you save into a personal pension, and are you worried about the impact of inflation on your savings? Are you investing most of your pot, and sticking a large proportion in cash? We’d be interested to hear from you. You can join the conversation on the Community forum or post a comment below.

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