When planning for retirement, one of the most important, and often overlooked, risks to consider is inflation. While it might not sound as dramatic as a market crash or a global recession, inflation can quietly erode the real value of your pension over time, especially in a country like Ireland where living costs have risen significantly in recent years.
Whether you’re just starting your pension journey or nearing retirement, understanding how inflation affects your pension is essential for making informed financial decisions. In this blog, we’ll explore the impact of inflation on pensions in Ireland, the current economic context, and what steps you can take to protect your retirement income.
Inflation is the rate at which the general level of prices for goods and services rises over time. It means that the euro in your pocket today won’t stretch as far in 10, 20, or 30 years. For pension holders, this is a serious concern because it reduces the purchasing power of your retirement income.
For example, if you retire today with a pension of €30,000 a year, and inflation averages 3% per year, your pension’s purchasing power would effectively halve in about 24 years unless your income rises to match.
Ireland, like many countries, has experienced periods of low inflation and sudden spikes in recent years. According to the Central Statistics Office (CSO), inflation hit 9.2% in October 2022, its highest in almost 40 years, largely driven by energy and food price increases. While inflation has eased since then, the lingering effects are still felt in the cost of living – particularly for retirees on fixed incomes.
Housing, healthcare, and utilities – all significant expenses in retirement – have become more expensive. If your pension income doesn’t keep up with these increases, you may find yourself having to cut back on essentials or dip into your savings more than planned.
In Ireland, pensions generally fall into three main categories: State pensions, occupational pensions, and personal pensions. Each is impacted by inflation in different ways:
The State Pension in Ireland is not automatically indexed to inflation. While the government may adjust the payment annually during the Budget, increases are often modest and may not fully reflect the actual rise in living costs.
For example, in Budget 2024, the State Pension was increased by €12 per week. However, this doesn’t always match or exceed inflation rates, particularly during high-inflation years. This can significantly affect retirees who rely heavily or solely on the State Pension.
A Defined Benefit pension offers a guaranteed income in retirement, often linked to your final salary and years of service. However, cost-of-living increases are not guaranteed unless your scheme specifically includes indexation (inflation-proofing).
Some older DB schemes include inflation linkage, but many newer or revised schemes do not. This means your pension income may remain fixed for decades, while the cost of living continues to rise.
Defined Contribution and Personal Retirement Savings Accounts (PRSAs) depend on investment returns and how you draw down the funds in retirement. Here, inflation becomes a double threat:
Without a structured drawdown strategy or inflation-linked investments, you risk depleting your pension pot too early.
Let’s say you retire at age 66 with an annual pension income of €25,000.
That’s a major drop in your ability to cover everyday costs, especially as health-related expenses typically increase with age.
While inflation is beyond your control, you can take steps to safeguard your pension:
The earlier you start contributing to your pension, the more time your money has to grow and outpace inflation. Aim to increase your contributions as your salary rises.
Ensure your pension funds are invested in a diversified portfolio with assets that historically outperform inflation over the long term, such as equities or inflation-linked bonds. Speak with a financial advisor to find the right mix for your risk tolerance and age.
Don’t set and forget. Review your pension annually to ensure it’s on track and properly positioned for inflation. Pay attention to fund performance, fees, and asset allocation.
If you’re approaching retirement, explore options like:
Each year’s Budget can bring changes to pension thresholds, tax reliefs, and State Pension rates. Keeping informed allows you to adjust your plans accordingly.
Inflation is often called the “silent thief” of retirement – and for good reason. In Ireland’s current economic climate, it’s more important than ever to understand how rising prices can chip away at your pension’s real value. Whether you’re decades away from retirement or already drawing down your pension, taking steps now to account for inflation can make the difference between a comfortable retirement and one filled with financial stress.
If you’re unsure where you stand, consider speaking with a qualified financial advisor who can help you inflation-proof your pension strategy for the long haul.
