What do we want? We want inflation protection, we want it now, and we want it, ideally, in a highly-reliable set-and-forget format please.
I’m a passive investor after all, and I’ve been hunting for alternatives since the passive investor’s choice of inflation insulation – a short-duration index-linked bond ETF – had a [checks glossary of terms] ‘mare during the post-Covid CPI blow-up.
The purpose of this article, then, is to run through the list of other potential antidotes to see how they actually performed when prices boiled over.
We’ve previously looked at the scale of defeat for short-duration index-linked bond1 funds, and also the so-so performance of the most obvious replacement – a DIY portfolio of individual index-linked gilts.
Here’s a quick refresher via a chart:

Data from JustETF, Tradeweb and ONS. February 2025
As you can see, neither of our index-linked contenders actually kept up with inflation. Disappointing.
Partly the problem was that inflation-linked bonds were saddled with negative yields going into the pandemic inflation. And partly that the subsequent rise in yields – from negative to positive – inflicted a substantial price hit.
Today a portfolio of individual linkers looks a good inflation hedge because they’re on positive yields.
But assembling such a portfolio requires some work. For many, it seems like an arcane and fiddly task – like building your own microcomputer in the 1970s and ’80s.
Isn’t there a BBC Micro, ZX81, or failing that, a VIC-20 of inflation containment you can just buy off the shelf? By which I mean a fund full of assets that eat rising prices for breakfast?
We’ll answer that in the next six charts. They show how most assets that could be turned to as your chief inflation-tamer dealt with the money monster from October 2021 to year-end 2024.
Note: all returns in this article are GBP nominal, dividends reinvested.
Inflation vs money market funds
How did cash do, as represented by money market funds?

Data from Heriot-Watt/ Institute and Faculty of Actuaries/ESCoE British Government Securities Database and ONS. February 2025
Cash was comfortably trashed.
For comparison, the annualised returns are:
- Cash: 3.5%
- Inflation: 5.9%
Money market rates were positive versus inflation in 2023 and 2024, but not enough to make up the lost ground. What’s more, money markets have been a real-terms loser all the way back to 2009 (bar a 0.4% gain in 2015).
Cash is popular now. Rates are high and bonds burned many investors. But money market funds have historically provided a flimsy inflation defence.
Inflation vs gold
Gold had a stormer. In fact, without wishing to ruin the surprise gold was the best asset in our round-up. (Oh dear, I’ve ruined the surprise!)

Data from The London Bullion Market Association and ONS. February 2025
Annualised returns:
- Gold: 15.9%
- Inflation: 5.9%
Gold has a reputation as an inflation hedge. A distinction that’s surely been burnished by its recent performance.
But gold isn’t really tethered to inflation.
Even the few years covered by the chart indicate it dances to a different tune. Inflation whips up in late 2021 and absolutely rages in 2022. However, we’re firmly back in the realms of standard-issue 2.5% inflation by 2024.
Whereas gold is on fire in 2024, does merely okay in 2023, and registers a 0.1% real terms loss in 2022.
Overall, gold holders can be very happy with their choice this time, but its future reliability remains an enigma.
It’s entirely plausible that gold is propped up in inflationary situations because many people believe it is an inflation hedge.
They take refuge in gold as inflation rates climb while bailing on asset classes that succumb to price pressure.
The problem is the lack of:
- A solid underlying theory which explains gold’s role as an inflation shield.
- A string of historical examples that provide convincing proof that gold withstands the heat when CPI melts-up.
Gold at least seems to thrive during periods of great uncertainty – and inflationary shocks do contribute towards a general sense of systematic instability.
Inflation vs commodities
Raw materials are part of the very physics of inflation itself. Can they help us?

Data from Bloomberg and ONS. February 2025
Annualised return:
- Commodities: 5.9%
- Inflation: 5.9%
Commodities scored a draw – precisely matching the rise in headline rates over the period.
However, there’s a canary in the coal mine relationship between commodities and high inflation.
Rising raw material costs feed inflation, which means that commodities prices have historically front-run UK CPI by a year or so. If we zoom out to include commodities’ 28% gain in 2021, then we discover that the asset class did comfortably beat inflation after all.
There is also good evidence that commodities have historically outperformed other asset classes when inflation flares up. I’ll dig into this in more detail soon.
The other point worth making is that commodities are highly volatile and negatively correlated with equities and bonds. Rebalance sharp-ish when commodity prices spike and you may earn a juicy rebalancing bonus for your trouble.
Inflation vs World equities
The next chart seems to be saying: forget all the fancy stuff, just focus on pound-cost averaging and keep your head:

Data from MSCI and ONS. February 2025
Annualised return:
- World equities: 10.8%
- Inflation: 5.9%
Equities slipped below inflation’s high-water mark in 2022 and 2023. Only to surface and rise like a continental crumple zone, once the price pressure subsided.
Historically equities have typically reacted to inflation like it’s an essential vitamin. The right dose keeps stocks – and the rest of the economy – humming. But too much and financial weakness, nausea, vomiting, and cramps follow.
Still, equities have always recovered quickly once inflation has returned to reasonable levels. We saw that again this time.
Perhaps young, resilient accumulators should forget about hedging inflation and focus on outrunning it.
Inflation vs all-comers
Just for fun, here’s everything piled into one uber bar-room brawl of a graph:

If your portfolio was this diversified then you could hardly have done much more. Here’s the full rundown of annualised results, along with cumulative returns in brackets:
- Inflation: 5.9% (20.6%)
- Linker fund: 0.6% (2.1%)
- Cash / money market: 3.5% (11.9%)
- Individual linker portfolio: 4.1% (14%)
- Commodities: 5.9% (20.4%)
- World equities: 10.8% (39.5%)
- Gold: 15.9% (61.4%)
Personally-speaking, the recent price spiral has profoundly reshaped my portfolio. I have since sold my linker fund and bought individual index-linked gilts, gold, and commodities instead.
Hopefully that means that – in tandem with a chunky equity allocation – my portfolio is better equipped to meet future inflationary bow waves.
Still, if you go to an anti-inflationary arms fair, you’ll meet plenty of people willing to sell you on all manner of other solutions…
Inflation countermeasure or counterfeit?
Here’s a selection of oft-cited inflation-busters, charted over the same period as before only this time in ETF form:

Data from JustETF
As a range-finder, an MSCI World equities ETF (cyan line) hits the right-hand side of the graph at the 39.5% mark.
Inflation itself would score 6% – about double the red real estate line.
WOOD, the global timber ETF (magenta line), trails the pack with a cumulative return of 1.2%. I looked at UK property, too, which was the only fund to post a negative return over the period.
The clear winner is the oil and gas equities ETF (blue line). Fossil fuel supply shocks are often a large component of unexpected inflation. You’ll recall that Putin invaded Ukraine in February 2022, and unleashed energy blackmail against Europe soon after.
I’ve also included an oil and gas commodity futures ETC (yellow line). Initially it leaps too, hedging inflation up to year-end 2023. But it was no inflation-beater beyond that, lagging CPI by the end of 2024.
It’s intriguing that infrastructure (orange line), real estate, and timber all enjoyed bounces in early 2022 as inflation bit hard. But only infrastructure maintained its momentum before falling behind inflation in 2023.
True, infrastructure was an inflation-beater again by the end of 2024. But it only delivered half the value of the MSCI World during the period.
Finally, the Momentum and Quality factor ETFs haven’t added anything new beyond extra squiggles on the graph. It’s only a short timeline, but their correlation with World equities is much more apparent than any link to inflation.
Over-inflated
Okay, ‘less is more’ is the phrase that always comes to mind after a strong bout of inflation – or to one of my posts. Once again I’ve failed to master the art of shrinkflation when it comes to Monevator word counts.
So next time I’ll dig deeper into the UK’s extensive historical archives of high-inflation episodes to see which asset classes held the line against successive waves of money rot.
Time to slap The Investor with an enormous wage demand!
Take it steady,
The Accumulator
- Colloquially known as ‘linkers’. [↩]
Thank you @TA. So interesting and helpful to see asset class movements over time. Inflation only really seems to be reliably beatable over the long term, so not really a strategy consideration whilst firmly in accumulation. In or nearing decumulation however, it is clearly a worry. Especially as even the very best laid strategies tend to wobble under fire. With US might-is-right isolationism looking like rewriting the world order, who can predict? Just at the moment, your ‘Survivalist’ portfolio from a decade ago appears to have much to commend it!
Thanks @TA, gold dust as usual (pun intended.)
Going into 2021 I had World Equities, Gold, an aggregate bond fund (AGGG) which I swapped into a short linker fund (GISG). I’ve since come out of GISG (disappointing for all the reasons you’ve outlined) and have added a Money Market fund (Royal London, which currently is yielding more than inflation) until I figure out what to do long term, and a slew of Infrastructure and Dividend funds in my ISA to provide me with wine… err, income. Though I think the wine is the best inflation hedge of the lot
I’m not convinced World Equities were a great inflation hedge, more hyped up in 2024 by AI and all things Mag7. If you cut of the graph at the end of 2023, you can see that World Equities (and Gold) held their own against inflation (which is still great) then they just took off.
I’ve been toying with the idea that if Commodities front run inflation, if I monitor the performance of e.g. UC15 and it begins to take off, I might rotate some from Money Market to UC15. Maybe.
Again, I fiddle always with the defensive side of my portfolio but leave the equity (growth) part to just get on with it. Ho-hum.
You’d think the list would be ILGs, Commodo, Gold, Equity income, REITs and Global Equity but, in truth, nothing really ‘works’ per se here.
Commodo gets you closest to the aim, but why not go straight to the commodity producers themselves (general miners and oil co’s.) because of their operating leverage?
Same for gold.
Gold miners have substantially underperformed the metal for a long time now. Perhaps they’ll revert. Perhaps not.
But, in either event, gold’s an uncertainty play and not a inflation one.
As for REITs, they get taken to the slaughter house when rates rise – which they normally do of course if inflation is up and to the right.
Maybe they’re better for disinflation, along with long bonds.
As for equities, well, they’re about future earnings and the ‘appropriate’ discount rates.
They *might* have moats and pricing power on sales (for quality income stocks) but, whatever the margin resilience they might show under high inflation, they will still be impacted by higher rates, and rates are always the gravity of markets, which go hand in hand with inflation like mass and gravity.
Long story short; there’s just no easy answers, and that’s even before trying to figure if the risk to protect is inflation/ reflation or deflation/ disinflation.
The joker in the pack is ILGs.
They can work, but you have to duration match individually to your holding period and then hold them to maturity. No trading in and out. No freaking out and selling when they’re down. No convenient ETFs to do it for you. That’s quite an ask for most investors.
I’m landing near to @Brod’s take on this immediately above. Maybe commodo, gold, MMFs and a big dollop of selected infra ITs with inflation coupled asset bases.
It’s an interesting and confounding topic for sure.
Personally I perhaps diverge a tad from @TA’s thinking, in that I don’t believe most people should be (or at least can afford to be) too concerned about hedging inflation at the portfolio level.
Accumulators for sure are best off IMHO trying to beat inflation over the long-term rather than hedging it (I think @TA would definitely agree with this!)
Inflation is much more of an issue for de-Accumulators, given the lack of ex-portfolio income coming in and the need to spend money from said portfolio, which they don’t want to see whittled away in terms of actual spending power.
(In contrast someone with many years of earnings ahead of them to save and invest can reasonably assume their earned income should do better than inflation over the long-term, at least ex-an AI revolution etc).
Even so, at any moment in time for most of its life, the vast bulk of a de-accumulator’s portfolio is going to be invested to be spent (many) years into the future. If you retire at 60 and have a 30-year time horizon (say) then I don’t see hedging inflation (versus beating inflation) as a priority, unless you’re extremely risk/volatility averse perhaps.
Beating inflation in contrast is clearly essential, even here.
Where I do see a stronger need to inflation-hedge is (especially near-term) actual cash payments. This is why an index-linked gilt ladder is so valuable, as TA has outlined many times over the past year or so.
You can specifically hedge your presumed cashflow needs, at least with respect to CPI, and on positive real yields now of course, so no nailed-on losses as were faced before the recent yield reset.
Maybe there’s some hybrid bucket solution to square the circle, where (say) 5-10 years spending worth of a de-accumulation portfolio’s assets could strongly lean in to inflation hedging if desired, and the rest continue to be invested with the aim of beating inflation?
Caveat: I do think differently about de-accumulation than most around here (e.g. I like natural yield etc) so take all the above with a pinch of salt.
Please see my article on hedging inflation vs beating it if you’re confused about the difference between the two:
https://monevator.com/beating-inflation/
@Brod – just been looking at commodities front-running high inflation behind the scenes. It’s definitely a thing.
@Delta Hedge – like your characterisation of gold as an “uncertainty play”. Very succinctly put!
@TI – I’m mostly in agreement with your view except:
Adding commodities and gold to a decumulation portfolio reduces downside volatility – so a great way to mitigate SORR risk plus add some inflation-hedging / beating capacity at the same time.
So I guess the difference between us is that I think allocations to both should be more of a priority for the retiree navigating the early years of decumulation – assuming they’re actually dependent on their portfolio and not some other tasty revenue source.
Totally agree that index-linked gilts are more about assuring a ready supply of inflation-hedged cash.
Would we all be happy with a nice ladder of NS&I index-linked certificates stretching endlessly into the future? I think that’s the role that linkers now play.
@TA – so, with absolutely no evidence, if commodities front-run inflation and equities lag inflation – whats the effect of combining the two when fighting inflation? Is there a smoothing effect?|
@TI – as an about-to-be de-accumulator, inflation and stock market crashes and lost decades and stagflation dominate my investing thinking. Accumulation is easy – save hard, invest in a world equity tracker and ignore the noise. De-accumulation not so much. And yes, I need to see inflation and withdrawal beating returns for 45 years if my wife is to be OK, so start with 50% equities and run down the defensive side of the portfolio for the first 10 or 15 years. Some mish-mash of bonds, cash, gold, commodities should see me through.
@Brod – yes, you’d have reduced real-terms losses when it really mattered. Essentially, your comment to TI tells me you’re thinking about exactly the right threats and coming up with the right antidote. Got a post coming up in the next month or so that puts some data on those bones. You’ve just given me an idea for a follow-up article, too!
@Brod — We’re all agreed that hedging inflation is a much more legitimate question for deaccumulators. We’re also agreed that this is especially important when it comes to near-term cash payments.
As a retiree you need that near-term money to buy near-term food, energy, and clothing! 🙂
However if one wants to immunise an entire portfolio against very near-term inflation then there will be a price to be paid, just as there is for accumulators who want to try to reduce the impact of market volatility on their portfolios.
For example, if one traded a 60/40 portfolio for 30-year linker ladder, then you’d be swapping the risks of uncertain real terms payments for certain payments, but you’ll also very likely be seeing much lower returns. This has the consequence of lower spending in retirement or else needing a bigger pot. (A bit like my own favourite of going for natural yield… 😉 )
If this isn’t true then we should all be swapping balanced 60/40 type portfolios for linker ladders today, regardless of our life status… 😉
More to the point though, is this the correct trade-off for retirees? For some – perhaps a lot – of people, maybe it is – especially with some (likely large) chunk of their portfolio.
But as I said above, I’d think about why you need to care whether ‘money for 20 years in the future’ is lagging inflation for a couple of years, if by the time those 20 years have passed you can reasonably believe (based on historical returns precedent) that such ’20 year money’ will have *beaten* inflation by a wide margin.
And a 45-year long time horizon is pretty much that of a 20-year old saving for retirement! 🙂
We often urge accumulators to think of putting up with / ignoring market volatility as the price of higher returns. I am noting the same can be true of *near* term inflation / hedging, for some large portion of a retirement portfolio. (Long-term inflation is another kettle of fish altogether!)
It’s easy to see the concrete concerns of near-term inflation. “My pot was £750,000 in 2021, now in real terms it’s only £550,000 in 2021 money!” (or whatever, I’m pulling these numbers from the air). Yes, but what matters here is the £20,000 p.a. (say) that you intended to spend over the next few years, not the (say) £400,000 that will continue to run.
None of this is to say we shouldn’t be thinking about all this, looking at what does hedge inflation etc.
We should! 🙂 Deaccumulation is the thorniest problem in finance for good reason.
I’m just introducing these thoughts by way of balance, not least because a blog post by its nature tends to lean heavily to one side of the story. (If @TA or myself or maybe I’m sure you @Brod were to write a chapter in a book about inflation and deaccumulation, we’d all include all the thoughts in these comments of mine. 🙂 )
Interesting to see one US fund manager launch an ultra short tips fund with the aim of more closely matching inflation https://www.ft.com/content/da956b7d-b492-469b-8609-fde1d07cbc14 (try googling “New Tips ETF aims to solve the funds’ Achilles heel” if you’re not an ft subscriber)
@TI (#8)
Re: Decumulation
For me, decumulation becomes a matter of securing enough income and not returns (the latter are a means to an end and not the end itself).
ILG ladder: Currently you can get a largely inflation-linked income over a period of 35 years (suitable for a 60-65 year old retiree) with a payout rate of 3.6%. This can be built in advance currently with a real growth rate of about 1.8% (the withdrawal rate for a 35 year ladder to start in 10 years is about 4.3% and with a 20 year delay about 4.8%).
RPI annuity: At the beginning of Feb, RPI annuities were available at 65yo with payout rates of 4.2% (joint, 100% survivor) or 4.9% (single life). At 60yo the rates were 3.6% (joint) and 4.3% (single).
Portfolio.
a) SWR: Unknown, although historical worst case ones for 30-year UK retirements were around 3.0% to 3.5%
b) Variable income (whether natural yield or otherwise): Unknown, but historically on an annual basis it varied somewhere between 1% and 10+% of the original portfolio (in real terms) depending on market conditions and the exact strategy adopted.
Using an annuity and/or an ILG coupled with the state pension can provide an almost risk-free* baseline of income. The variability of the total income (i.e., baseline income + portfolio income) is then reduced. The downside is that legacy (particularly for the annuity, although guarantee periods can help to offset that) will be reduced for a variable withdrawal strategy and might be reduced for a SWR approach.
*risk of insurance company failure, government default, and hyper-inflation all remain
@Alan S — All good thoughts.
I don’t disagree of course with your main point and indeed as @TA mentioned the other day I’ve been nagging him about covering the more attractive annuity rates for a while now. 🙂 As for index-linked gilts I began to flag them back in June 2023!
https://monevator.com/index-linked-gilts/
So if someone wants to and can afford to go fully secure, the option is there, agreed, and it’s much more attractive at today’s prices than the nailed-on negative yields of 2020 etc.
However I would say your summary does underplay the *likely but not certain* return differential of entirely swapping uncertain portfolio returns for the certainty of an index-linked ladder. (I note you do mention it in the variable bit ‘b)’ of your comments on variable returns.)
Over the 30 years this is very likely to be very big, at least if historical trends continue.
Personally, and presuming no imminent Euromillions win, I’d probably either IL ladder / annuity the ‘income floor’ or I’d create some kind of safe ten year bucket of index-linkers, and I’d leave the rest to run in a drawdown portfolio of some sort.
But I’d certainly be paying attention in this scenario, and that’s not what a lot of people want (or can?) be doing in older age, so that’s factor too.
p.s. Sorry, forgot to include that it is not only about legacy, it will also impact our retiree’s lifetime spending expectations and capacity.
But yes, less so if one is only assuming a 4% SWR from a drawdown portfolio anyway.
To some extent though higher yields are telling us that expectation is probably a little low? (But we’re deep into hand-waving uncertainty here of course).
@TI (#11)
Since I have some data (macrohistory.net) and code to hand, let’s assume that the retiree implements a variable withdrawal strategy such that they start with 4.0% of their current portfolio and increase the percentage by 10bp per year (i.e., they will take 4.1% of the portfolio in year 2, 4.2% in year 3, … 7.4% in year 35). If the retiree starts with £500k in their portfolio, then their first withdrawal will be £20k. If the retiree is single, 67yo, and have a full state pension, their initial income will be about 20+11.5=£31.5k.
Using a portfolio of 30% US stocks, 30% UK stocks, 20% UK long bonds, and 20% UK cash, the maximum annual withdrawal across all retirements was about 15% real (i.e., in real terms, £75k), while the minimum withdrawal across all retirements was 1.6% (i.e., in real terms £8k). The portfolio after 35 years lay between 21.5% (i.e, about £100k in real terms) and 180% (i.e., about £900k)
Case 1 (portfolio+SP)
Historically, their income would have fallen between 11.5+8=19.5k and 11.5+75=86.5k.
Case 2 (portfolio+annuity+SP)
Let’s assume that the retiree can buy an RPI annuity with a payout rate of 4% at 67yo and decide to use half of their portfolio to do so. Their baseline income is now 11.5+10=21.5k.
Portfolio withdrawals are now halved* (because half of the portfolio has been used to buy an annuity!) and historically ranged from £4k to £37.5k. So, the overall income for the retiree would now have fallen between £25.5k and £59k. The legacy would be halved and lie from £50k to £450k.
Case 1 or Case 2?
Whether Case 1 or Case 2 looks more attractive depends on a number of things. For example, a comparison of core expenditure and the minimum income (if the retiree has a core expenditure of £14.5k – i.e., the PLSA minimum) then they might be happy with either approach. If their core expenditure is closer to PLSA ‘moderate’ (31k) then they might feel happier with case 2. However, there is no doubt that buying an annuity strongly reduces the upside, so in good markets, the retiree would have less to spend.
* I note that having bought the annuity there is a case for increasing the equity content of the residual portfolio which would change the historical withdrawals (particularly on the upside).
@Alan — Very interesting, thanks for running those numbers. 🙂 Yes, floor with linkers and strongly equity-heavy drawdown for upside continues to be indicated for me personally, but everyone’s mileage will vary.
If I could add thanks too @Alan S #13. That research is priceless. Thank you.
@Alan.
Interesting stuff.
What data are you working with there? Are you working with 35 year rolling
periods? How many observations do you have? Is the portfolio regularly rebalanced or left to run?
@TI – yes, I agree hedging inflation for the whole portfolio has consequences.
In my situation, in 8 years I (should!) get an inflation adjusted pensions of double our absolute-rock-bottom-essentials expenditure – food, council tax and utilities only. To get there I need some reasonable inflation protection for my near term/defensive assets. Currently Money Market, Gold, a few years short term bonds to maturity and BHMG. Commodities are on the to-do list 🙂
The equity portion is for year 9+ and I hope will outrun inflation. That’s the legacy for my wife, if you will.
@Vic Mackey (#16)
The asset returns and inflation data are from macrohistory.net (a free source that TI and TA also exploit here). Unlike TA, I’ve never got around to creating a cap-weighted international index hence the arbitrary mix of UK/US shares (given the uncertainties it is probably good enough). Rolling 35 year periods from 1872 onwards with annual rebalancing to a constant asset allocation*.
* There are several ways of thinking about asset allocation in the residual portfolio once sources of guaranteed income (GI) are incorporated. The easiest is to set a constant allocation, although this means the proportion of equities in the overall holdings (i.e., including GI) will then increase with time as the GI is spent down. While I’ve modelled more sophisticated approaches (e.g., linear decreases in the equity allocation of the residual portfolio), it doesn’t make a massive difference to the outcomes.
@Brod
I’ve got 7 years until DB pension and recently but the Bullet with a 7 year gilt ladder of £40k pa. I was sat on cash for too long and the ~4.5% YTM sealed the deal. Hopefully inflation averages sub 3% over the next few years
PCLS arriving in a few weeks, so more decisions to make – I did look at a motorhome at the weekend…..
Pfau, et al Retirement Income Style Awareness (RISA) which identifies four classes of preferred approaches. What you describe at #8 is iaw what they call time segmentation. What Alan S describes is known in the RISA as income protection. IMO, the RISA framework might help frame the discussion better.
@Alan #18
This kind of analysis and output should be what this community should be interested in.
I wonder if your work and various thoughts around it are worth an article here in itself. There would be some good charts and discussions to come out of it I would think.
@Brod
I recognise your situation. If my experience is anything to go by the most important factor is what you will spend vs what you currently think you will spend. In my case I ended up taking my DB pension earlier than foreseen too.
Go well!
I’m not at retirement age yet, so this is somewhat theoretical, but my current thinking is leaning towards taking an inflation-linked annuity with half my pot, and keeping the remaining half invested (likely 100% in equities) for drawdown. The trigger for retirement is when the purchased annuity can cover my essential living costs. The drawdown is therefore reserved solely for spending on luxuries, and potentially to cover any one-off big costs.
To me this provides the best of both worlds and alleviates a number of issues associated with going all-in on either an annuity or drawdown. Firstly, the annuity part almost eliminates the risk of running out of money that is seemingly the main risk associated with drawdown (notwithstanding risk of annuity provider going bust, but presumably this could be partially mitigated by spreading the annuity out over two providers). Keeping half invested then means you have a substantial war chest to deal with big surprises or planned splurges, and/or to potentially pass on an inheritance, which seems to me the main problem with annuities.
Given that essential costs are (almost) guaranteed by the annuity, the remaining pot can also be invested more aggressively (e.g. 100% stocks) and potentially with a higher withdrawal rate, safe in the knowledge that there should be plenty of scope to temporarily reduce drawdown in a bear market (given that essential spending is already accounted for), thus reducing sequence of returns risk.
The worse risk is inflation, stagflation and high rates.
The last one generally afflicts itself at the same time as the former two.
Deflation, depression and low rates eventually play to the strengths of fixed income and dividend payers.
They also boost growth stocks – particularly those whose profit potential lies in the future.
And it’s easy for governments to reflate through various levers of liquidity injection and/or stimulus.
So, in that sense perhaps, inflation is the biggie to worry about because you have to then worry about stagflation, higher rates and austerity as governments try and put the cork back to contain expenditure against a backdrop of higher government debt interest repayments.
Shares wilt. Bonds fall. Duration gets punished. Long ILGs and TIPS battered beyond recognition. FUBAR territory.
Gold might, or might not, rally (high rates give an opportunity cost to holding anything without yield).
Commodities and their producers might help, but – if it’s a scenario of stagflation – then demand may be in the process of being destroyed against the background of high general inflation. And commodity producer input costs can, and often do, rise faster than the price of commodities themselves.
Any solution before the event is going to turn out to be a very rough fit.
Strangely it *might* be an opportunity to accumulate the casualties at knock down prices, i.e. REITs, long bonds, infrastructure, growth stocks, dividend stocks.
But its pretty hard for the average punter of normal phlegm and fortitude to move further up the risk scale when they’ve just been badly mauled by the inflation (and rates) monstrosity.
@AW (#23)
Annuities are likely to be covered by the FSC in the event of insurance company failure.
From their website
“Generally, FSCS can protect pensions that are provided by UK-regulated insurers, as long as they qualify as ‘contracts of long-term insurance’. A common example is an annuity, where you exchange the cash in your pension for a regular income from an insurance company. ”
and
“Where FSCS can pay compensation, we will cover the pension at 100% with no upper cap. We cannot confirm whether individual plans with specific providers would be classed as ‘contracts of long-term insurance’ or not – you would need to speak to your provider directly. ”
I think there are only 5(?) large providers left in the UK (Aviva, L&G, Scottish Widows, Standard Life, and Canada Life), although could be wrong.
@AW(#23):
Tricky bit is accurately estimating your retired essentials spend prior to retiring! Buying too much flooring IMO can be wasteful.
I would split the non-annuity part of your Pot to include some easy access Reserves (dry powder, if you like).
@AW – this is an excellent plan! Sometimes known as the Floor and Upside strategy. I think you’re right, it is the best of both worlds. Close family in the generation upstream from me is doing very well on it 🙂
@Alan S (#25). This is very useful to know, thanks. I hadn’t realised FSCS would cover annuities, and with no upper limit too. Compelling!
@Al Cam (#26). I agrees that there’s always some uncertainty, but I’d be happy using historical spending as a reasonable proxy. And yes, there would almost certainly be a pot of cash involved in there somewhere.
@TA (#27). Thanks. Good to know this is something you’ve seen work well. I suppose it’s somewhat down to individual luck with annuity rates at the point of pulling the trigger, which is probably the only downside I can see.
@AW (#28):
FWIW, I did that [“using historical spending”] and in my case it produced a significant over-estimate – which I have written about before @Monevator. Of course, YMMV!
@AW (#28)
FWIW, like Al Cam, the estimates of retirement expenditure I made during planning have also been slight overestimates (by about 5 to 10% or so), although retiring shortly before the pandemic certainly reduced expenditure!
I too am using a ‘floor and upside’ approach, although my floor is provided by a (largely) index-linked DB pension and is probably a bit larger than absolutely necessary (but, unlike annuities, lacked sufficient flexibility to make any significant changes – although I did increase the TFLS above the standard amount).
One approach to the problem (if it is a problem) of ‘over-annuitisation’ is to stagger annuity purchases over time. For example, buy the first one to provide a cover a very conservative estimate of your expenditure and buy a second if necessary. There are risks to this approach (e.g., yields and annuity rates fall or the portfolio value is reduced in real terms).
@AW – the annuity rates were bad at the time (bought after interest rates collapsed in the wake of the GFC) but not as bad as they would get. So we bought what we could afford and cut the cloth to suit.
Amazingly, hedonic adaptation works both ways. In one particular case, my family member adapted brilliantly to an income that was slightly lower than hoped. But over time, their income has likely outpaced inflation somewhat due to a mix of 5% escalation, RPI-linked annuities, and triple lock. Meanwhile, the upside portfolio has done wonderfully well. They’re now very comfortable relative to a pre-annuity period that was characterised by uncertainty, stress and doubt. The important thing is they sleep at night.
@AW(#28):
All I will add is that Alan S’s estimates (#30) were much better than mine!
@AW,
Some of my thoughts/lessons/etc on implementing F&U in the UK are given in the comments to the @M post “should I build an index linked ladder” from a while back