Effect of inflation on private pension

siblers

Hi

I understand that this may not have a simple answer. I've a private company pension where my employer matches my contribution each month.

As inflation goes up, the value of my pension goes down, is there a way for me to 'protect' my pension against inflation? Should I be looking to invest my pension into bonds or something like that?

Thanks

Peregrinus

You can invest your pension - to the extend that you have any control over investment, of course - in assets that are likely to rise in value more or less in line with inflation.

Traditionally whate are called "real assets" (property, and shares in trading companies) are expected, more or less, to rise in line with inflation. Property, for instance, derives its value from the rents people are willing to pay; as inflation goes up, rents go up, and property values go up. Likewise, companies - I'm oversimplifying here, but the point generally holds good - make things and sell them to people, so if prices go up they can sell things for a higher price and their share value goes up accordingly.

So, to hedge against inflation, the convetnional wisdom is to invest in a diversified portfolio of property and/or shares.

Two things to note.

First, this isn't an exact match. Over the long term, the value of your investments should hold its own against inflation. But in the short and medium term, this won't always be true. But this is a pension investment; you won't be drawing it down until you retire, which may be many years away, so the long-term performance is what matters to you.

Secondly, real assets are volatile - they swing up and down quite a bit in quite a short time. For the reason just pointed out, what pension investments do in quite a short time doesn't matter very much, but a lot of people find short-term volatility very hard to take, so be aware that it will happen and realise that it's not something that should worry you.

You can guard against short-term volatility by holding your investments in cash, bank deposits and the like. These are very, very stable and rarely if ever go down in value. But, even with interest payments, they don't keep pace with inflation in the long term. Keep your savings in cash and near-cash for thirty years and the real value of your savings is pretty much guaranteed to decline.

So, probably a good strategy is, until about 5 years before you expect to retire, keep your pension investments in property and/or equities. Then, every six months or so, transfer a chunk of them to more stable investments - cash, gilts so that by the time you retire maybe half your savings are in very stable funds, and the other half in real assets.

siblers

Thanks very much. Much appreciated!