How can I protect my pension from rising inflation?

In our weekly series, readers can email any questions about their finances to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot and has worked in financial services for 25 years. If you have a question for her, email us at money@inews.co.uk. Question: I’m retired and worried inflation will rise again. How can I protect my pension income without drawing down too much of my pension too soon? Answer: Worrying about inflation in retirement is entirely understandable. Recent tensions in the Middle East have pushed energy prices higher, raising concerns that fuel, transport and household costs could all become more expensive. The Bank of England has already warned that higher energy prices are likely to feed through into inflation later this year, and financial markets have begun debating whether interest rates may need to stay higher for longer, or even rise further, to keep inflation under control. Shorts Against that backdrop, it’s easy to assume the safest response is to draw more income from your pension while you can. In reality, taking too much too soon can leave you with a different problem later on, as your pension has less opportunity to support your spending needs in the years ahead. The challenge is finding the balance between protecting your spending power today and making sure your pension can continue supporting you for what could be several decades of retirement. That means taking inflation seriously, but not letting it drive short-term decisions. One of the hardest parts of retirement is adjusting to the fact that your pension won’t move in a straight line. While you’re working and paying into it every month, market fluctuations can feel fairly distant. Once you’re relying on your pension for income, every market dip suddenly feels much more dramatic. That’s often when people become tempted to change course. They move money into cash, reduce their exposure to investments or increase withdrawals because they’re worried about what might happen next. Yet volatility is not necessarily something to fear. In fact, periods of uncertainty often create opportunities for long-term investors. Most pensions invested for income are held in managed funds. Put simply, that means a professional investment team spreads your money across different types of investments, such as shares, bonds and cash, rather than relying on a handful of companies, sectors or markets. The aim isn’t to avoid ups and downs altogether because that’s impossible. It’s to ensure your money remains well diversified and has the potential to grow over time. That is particularly important when inflation is a concern. Keeping large amounts in cash may feel reassuring, but if inflation remains elevated for several years, the real value of that money can gradually be eroded. Investments that experience short-term fluctuations often provide a better chance of keeping pace with rising prices over the longer term. I’d also be cautious about taking investment tips from newspaper headlines or conversations down the pub. Everyone knows somebody who claims to have called the market perfectly, but successful retirement planning is rarely about making dramatic moves. It’s about having a sensible strategy and sticking with it through periods of uncertainty. I also think one of the biggest challenges facing retirees today is the ability to monitor pension values constantly. A worrying headline appears, you open an app, see your fund has fallen and suddenly a temporary market movement starts to feel like a permanent loss. Previous generations were largely spared that experience because they only saw updates every few months. History shows that markets typically recover from setbacks, although there are no guarantees. Many investors who panic during periods of turbulence later discover that markets recovered while they were busy worrying. If inflation does prove more persistent than expected, it may be worth reviewing whether your portfolio is sufficiently diversified across different regions, sectors and asset classes, and whether your withdrawal rate remains sustainable. What I’d avoid is making knee-jerk decisions based on short-term events.