Earlier this week, Andy Burnham took up his new position as Prime Minister, replacing Keir Starmer. As is the case with any new government, there is an expectation of new policies to allow Burnham to make his mark. These policies can have an impact on the UK’s economy as it reacts and attempts to settle. This can lead to fluctuations in inflation rates and interest rates.
In this article we’ll discuss what inflation is, and how it can impact your investments, including pensions and Stocks and Shares ISAs.
What is inflation?
Inflation is the measure of how much the price of products and services have increased. The Office for National Statistics (ONS) calculates the Consumer Price Index (CPI). It takes a ‘shopping basket’ of items and calculates the increased cost of items on average now versus a year ago. For example, if a loaf of bread cost £1 a year ago, and now costs £1.02, the price has risen by 2%. The ‘shopping basket’ features the same items each month, for consistency.
The Bank of England is responsible for keeping inflation low and stable. A target of 2% inflation is set by the government. If inflation falls more than 1% either side of this, the Bank of England must inform the government of the actions it will take to bring inflation back to its target.
How inflation impacts pensions
The Pension Triple Lock is a measure determining the rise of the State Pension each April. It uses inflation as one of the determining factors, alongside the average increase in wages between May and July, and a flat rate of 2.5%. The highest of these three factors determines by how much State Pension will rise. In April 2026, the State Pension rose by 4.8% due to the average wage increase. You can read more about what the pension Triple Lock means for your retirement in our previous blog post.
Private pensions are long-term investments. Whilst, as with any investment, there is no guarantee of growth, your funds should grow over time*. Usually, pensions will grow at a faster rate than inflation, but this is not always the case. As such, it is important to regularly review your pension. Inflation should be part of your pension growth calculation to determine how it has grown (or not) in real terms.
Example 1
You have held your pension for 10 years. Your pension pot grows by 2% per year. Inflation is at the Bank of England target of 2%. In real terms there has been no pension growth overall.
Example 2
You have held your pension for 10 years. Your pension pot grows by 5% per year. Inflation is at the Bank of England target of 2%. Your pension has grown in real terms. The rate of inflation is lower than the pension growth. You can buy more with the value in your pension pot than you could at the start of the ten years.
Example 3
You have held your pension for 10 years. Your pension pot grows by 1% per year. Inflation is at the Bank of England target of 2%. The rate of inflation is higher than the pension growth. You can buy less with the value in your pension pot than you could at the start of the ten years. Though your pension pot has grown, due to inflation it hasn’t in real terms.
These examples show the importance of regularly checking your pension – you can find out more in our previous blog post. The same is true for other savings and investments. Without reviewing them, you may find yourself with less available, in real terms, than expected.
Impact for those withdrawing from their pension
Inflation can also impact those already withdrawing their pension. If you are taking regular withdrawals as a set percentage of your pension pot, for example, you should be aware of changes in inflation rate. If it rises, taking the same amount as usual from your pension may leave you unable to afford what you normally do. This is because your pension withdrawal will not stretch as far due to inflation. Similarly if it falls, you may find that you are able to lower the amount you withdraw. This would, in turn, make your pension pot last longer through your retirement.
How inflation impacts your ISA
Stocks and Shares ISAs have shown historically that they outperform Cash ISAs, in terms of growth, over the long-term. According to data from Curvo and Yahoo! Finance the average annualised return for the FTSE100 over the past 20 years was 6.7%, assuming any dividends were reinvested. Over the same time, the average inflation was 2.9%. So, on average, the stock market, and therefore Stocks and Shares ISAs, beat inflation.
Access to funds in ISAs is possible, however they should be considered as medium-to-long-term investments for optimum growth potential. Not only are they likely to outperform* savings accounts and cash ISAs, but inflation too. Indeed, low interest rates on cash ISAs and savings accounts may not consistently outperform inflation. So, putting money in a Stocks and Shares ISA may not just be a tax-efficient investment. It may also be an effective means of shielding your money from inflation.
Of course, as with any investments, growth is not guaranteed. That’s why we would encourage you to consult experts such as the team at Willday Wealth Management before taking action. You can book a consultation with us by calling 0116 222 0119 or emailing hi@willdaywm.co.uk.
Closing thoughts
Inflation is unpredictable at best. The Bank of England and the government may have plans to control it. However global or UK events can trigger changes. For example, following a peace deal between the US and Iran, fuel prices eased, and inflation predictions became more favourable. Previously, it was predicted that inflation would fall to the target of 2% by the end of 2027. This has now been upgraded with predictions of a slight rise in inflation in coming months, before falling to 2% by mid-2027. That said, in recent weeks, the ceasefire between the US and Iran has collapsed. Oil prices immediately surged, and with it, the world economy became turbulent again. A knock-on effect could be seen in inflation rates in the coming months. We’ll bring you any important updates that could impact your investments, so watch this space.
In the meantime, we suggest reviewing your investments regularly to ensure your money is working harder for you. Call our team to discuss any concerns or questions you may have.
*With investing your capital is at risk and you may get less than what you invested
