What is inflation?Inflation is a general increase in the price of goods and services over a period of time. Put simply, you can buy less today than you could yesterday with the same amount of money.
To control inflation, central banks increase the interest rates they charge on loans to commercial banks. Commercial banks then pass on these higher rates to their clients.
What does inflation mean for your private pension?Inflation may impact your financial situation and reduce your purchasing power now and in the long term.
Consider your options carefully before taking important decisions on your private pension products, such as temporarily suspending contributions to your pension, because these decisions can also impact your financial situation now and in the future.
How could inflation affect your private pension?Inflation may mean your investments are less profitable for you.
It can lead to you having less disposable income now or in the future based on the returns on your private pension.
For example, when you retire, no matter how long you have contributed, the amount you have saved in your pension pot may not be adjusted to the rate of inflation: your purchasing power could therefore be reduced.
2 steps you can take to deal with the impact of inflation and rising interest rates on your private pensions
Avoid taking hasty decisionsPrivate pensions have a long-term horizon. Keep in mind that saving less now to have more immediate income, means less pension in the future, which may not match your retirement needs.
Adopt a long-term perspectiveYou should not look only at the short-term impact of high inflation, but consider that in the long-term the situation will change.
If you are already approaching retirement and considering buying a lifetime annuity, you could also consider an inflation-linked annuity, which will protect your annuity against inflation. This product will start at a much lower rate, but it will help you avoid any inflation risk in the future.