Metis AM
With inflation continuing to rise well above the Bank of England’s (BoE) 2% target, you may be wondering what this could mean for your pension pot and overall retirement plan.
According to the Office for National Statistics (ONS), inflation hit an 18-month high in July 2025, rising by 3.8% in the 12 months prior. Despite gradually cutting interest rates over the past year, the BoE seemingly doesn’t expect to meet its inflation target any time soon – with current forecasts predicting an inflation peak of 4% in September.
Rising inflation can have a varying degree of impact on your retirement plan. Ultimately, it will depend on how your pension pot and other savings are structured, whether you’ve purchased or plan to purchase an annuity, and the lifestyle you have in mind for retirement – among many more factors.
Read on to learn what rising inflation could mean for your retirement income.
The State Pension is protected by the triple lock
The triple lock aims to prevent the value of the new State Pension from being eroded over time. In effect, it ensures an annual rise in State Pension payments, using the highest of three metrics to determine the increase:
- The rate of inflation
- Average earnings growth
- 2.5%
As a result, retirees claiming the new State Pension can assume that, for the time being, their payments will keep pace with the rising cost of living at a minimum. These annual State Pension increases may even exceed the rate of inflation – as we saw in the 2025/26 tax year, when the growth in average earnings triggered a 4.1% rise in State Pension payments.
However, while the government has committed to keeping the triple lock in place for the duration of this parliament, there are no guarantees in the long run. Forecasts reported by BBC News suggest that the triple lock could cost the government three times more than originally anticipated – possibly making it a prime target for future spending cuts.
What’s more, if it continues to rise annually, the new State Pension could become subject to Income Tax in the coming years. The Personal Allowance is frozen at £12,570 until 2028, and if the full new State Pension reaches this threshold, it could push retirees’ tax bills higher.
Regardless of whether the triple lock remains in place, it may not be wise to rely on the State Pension alone to fund your retirement. Maximum weekly payments for those reaching State Pension age after 2016 sit at £230.25 (£11,973 a year) for the 2025/26 tax year, which may not be sufficient for the comfortable retirement lifestyle you’re hoping for.
Many retirees use the State Pension to supplement their income, rather than seeing it as a primary source of financial stability.
Defined contribution pensions rely on investments keeping pace with inflation
The most common type of workplace and private pension scheme, defined contribution (DC) pensions, generally do not provide a retirement income tied to inflation.
The money you and your employer pay in is invested in a range of assets, so your pension pot’s value is determined by:
- The value of your and your employer’s lifetime contributions
- The performance of your investments
- Tax relief.
So, it is crucial to engage with your pension throughout your working life to ensure your portfolio has the chance to deliver adequate returns. This might include claiming higher- or additional-rate tax relief if you’re eligible, checking in on investment returns, and maximising your contributions when you can.
Defined benefit pensions are often tied to inflation
Unlike DC schemes, defined benefit (DB) pensions – also known as “final salary” or “career average” schemes – provide a guaranteed income that is often linked to inflation.
These schemes are usually the responsibility of your employer, meaning you don’t contribute anything yourself. You’ll receive a regular income for either a set number of years or the rest of your life, which is calculated based on factors such as how long you’ve worked for the company, final or average salary, and accrual rate.
However, while your retirement income will generally rise with inflation, PensionsAge reported in 2024 that 68% of DB schemes had capped their inflationary increases at 5% for post-1997 benefits.
So, if inflation exceeds 5% during your retirement, you could see your pension’s spending power diminished.
Annuities can either be fixed at a certain rate, or rise over time
If you’re planning to purchase an annuity for your retirement, or have already done so, the impact of inflation will depend on the type of annuity you choose.
Fixed-term and level annuities
While a fixed-term annuity will pay you a set income for a specific number of years, generally with a lump sum at the end, a level annuity will usually pay out for the duration of your lifetime, with no lump sum.
Crucially, neither is linked to inflation, meaning your income may gradually lose spending power as inflation rises.
Index-linked and fixed escalating annuities
These annuities generally offer a lower starting income rate than fixed-term and level alternatives, but their rates do increase over time.
In the case of fixed escalating annuities, your income rises by a fixed percentage each year – which could exceed or fall short of inflation.
Index-linked escalating annuities, however, tie your income to the Retail Prices Index (RPI). This means your retirement income keeps pace with inflation, but it can also decrease if RPI is negative.
If you’re considering purchasing an annuity in retirement, a financial planner can help you determine which option is appropriate for you.
Consider inflation in your retirement plan
While inflation indices give an overall indication of how quickly prices are rising, increases are likely to vary from sector to sector. So, the specific impact on your finances will depend on where you spend your money.
As reported by BBC News, airfares increased by 30.2% in the summer of 2025 – the biggest school holiday jump since monthly data began in 2001. Meanwhile, food prices rose by 4.9% in the year to June. However, data from Statista shows that clothing and footwear prices have increased by just 0.3%.
When setting your goals for retirement saving, it’s important to consider what lifestyle choices you’re likely to make in retirement. Whether you’re hoping to travel the world or enjoy home comforts, by considering what prices could look like by the time you retire, you can help ensure you have enough set aside to achieve your goals.
Get in touch
At Metis Wealth, our financial planners can help you create a retirement plan that sets enough aside to help fund the retirement lifestyle you’re dreaming of – taking inflation, pension pots, annuity options, and your personal goals into consideration.
Contact us by emailing enquiries@metiswealth.co.uk or calling 0345 450 5670 to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.