A pension growing at 4% a year sounds like progress. If prices are rising at 4% a year, it isn’t.
Inflation is the gap between the number on your pension statement and what that number can actually buy. In retirement, where the same pot might need to support you for 25 or 30 years, that gap is the one that quietly does the most damage.
The maths
At an average 3% inflation, every £1 today is worth around 55p in 20 years. A £30,000 income now needs to be closer to £54,000 two decades later just to maintain the same standard of living. Put another way: at the Bank of England’s 2% inflation target, an income that doesn’t rise will buy almost half of what it does today after 30 years.
That isn’t a crash. It’s a slow leak. And unlike a market wobble, it doesn’t reverse.
The cost has already gone up
Recent inflation has rewritten a lot of retirement plans. Industry modelling suggests the average retiree may now need an additional £90,000 in pension savings to maintain a comfortable 20-year retirement, simply to absorb the higher cost of everyday goods. For a more “luxurious” retirement, the gap rises to around £140,000. The PLSA’s “comfortable” retirement living standard has also climbed materially in recent years for the same reason.
It’s a clear example of why retirement planning is a moving target, not a fixed one.
Where inflation hits a retirement plan
- Cash. Interest rates rarely beat inflation after tax. Long-term cash holdings almost always lose real value.
- Fixed annuities. A level £25,000 a year sounds generous at 65 and considerably less so at 85. Inflation-linked annuities exist, but you pay for them with a meaningfully lower starting income.
- The State Pension. It rises with the triple lock, but it was never designed to fund a full retirement on its own.
- Older workplace pensions. Some have inflation caps (commonly 2.5% or 5%) that haven’t kept pace with recent prices, especially during the 2022 to 2024 spike when CPI peaked above 11%.
- Drawdown plans built around static withdrawals. Taking a flat £20,000 a year that doesn’t increase with prices quietly erodes your lifestyle every year, even if the pot itself is performing fine.
What a SIPP lets you do about it
A SIPP keeps your money invested, in your name, on your terms, which is exactly what defending against inflation needs.
- Hold real assets. Global equity ETFs have historically delivered returns ahead of inflation over the long run. Cash cannot. Even a modest equity allocation in retirement materially improves the odds of keeping pace with prices.
- Diversify across currencies. A global portfolio means UK prices aren’t the only force acting on your pot. If sterling weakens, overseas holdings can act as a partial hedge.
- Use tax relief as a head start. A basic-rate taxpayer adds £100 to their pension for every £80 of take-home pay. Higher and additional-rate taxpayers can claim back more. That’s an instant uplift before any market return.
- Don’t pay to play. A 1% account fee on a £200,000 pot costs £2,000 a year, every year. With a fee-free SIPP, that’s money still working against inflation rather than for someone else.
- Stay invested in drawdown. Buying an annuity locks in today’s pound. Keeping part of your pot invested through drawdown gives the remainder a chance to keep growing through retirement, which is the most direct way to offset rising costs.
In short
Inflation is the one risk you’re guaranteed to face. Cash won’t beat it. A diversified, low-cost SIPP gives your money a serious chance to grow ahead of prices, decade after decade.
Important information
Capital at risk. The value of your investments can go down as well as up, and you may get back less than you put in.
Tax treatment depends on individual circumstances and is subject to change. ETF costs also apply.
This content is for information only and is not financial advice. If in doubt you may wish to consult a professional adviser for guidance.