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Inflation is the rate at which the average price of everyday goods and services rises. In the UK, the government sets a 2% inflation target for the Bank of England to achieve, measured by the Consumer Prices Index.
While inflation has fallen from its peak of 11.1% in October 2022, it has remained persistently higher than 2% for most of the past four years. According to the Office for National Statistics, inflation rose by 3% in the 12 months to January 2026.
This situation, where inflation remains higher for longer, is known as “sticky inflation”.
Not only is higher inflation likely to increase your household bills, but it may also quietly erode the purchasing power of your savings over time. This means that the same amount of money buys fewer goods and services in the future, so your retirement funds may not cover as many years of living costs. As a result, you might need to save and invest more to maintain the standard of living you desire.
Keep reading to discover three practical tips for protecting your wealth from inflation and keeping your retirement plans on track.
1. Don’t hold too much in cash – invest some of your wealth for growth
Keeping a cash buffer is a useful way to ensure that you can cover short-term expenses and unexpected costs.
However, cash is particularly vulnerable to the effects of higher inflation. Unless the interest rate on your savings account remains consistently higher than inflation, the value of your money in real terms will fall. As such, holding too much in cash could hamper your progress towards your retirement goals.
In contrast, equities – shares that give you ownership of a portion of a company – may offer some protection against sticky inflation. This is because some firms pass on increased costs to consumers. If revenue increases faster than costs, the resulting profit growth could allow stock prices and dividends to outpace inflation.
This chart from Fidelity shows the percentage of cases in which cash and UK stocks beat inflation between 1988 and 2025.
Source: Fidelity
As you can see, stocks and shares outperformed cash over all time periods. Moreover, the longer investors held on to stocks, the greater their chance of beating inflation.
While past performance is no guarantee of future returns, this data highlights the potential benefits of investing some of your retirement wealth for long-term growth.
2. Diversify your investments
Inflation doesn’t affect all assets equally. For example, when inflation goes up, bond prices typically fall, while property prices often rise.
That’s why spreading your wealth across different types of investments (“asset classes”) could make your portfolio more resilient to inflation. In other words, losses in one area might offset gains in another.
Of course, no investment is entirely risk-free or inflation-proof. However, diversifying across regions, sectors, and asset classes allows you to balance risk in line with your planned retirement age and improve the chances of returns outpacing inflation.
3. Use tax-efficient wrappers wisely
When prices are rising, tax on interest and dividends could further erode your real, after-inflation returns, leaving you with less spending power in retirement than you expect or hope to have.
In contrast, making the most of tax-efficient wrappers could ensure that more of your retirement wealth remains invested – rather than going to HMRC – giving it the potential to grow over time.
Two of the main tax wrappers you may want to use are:
ISAs
In the 2025/26 tax year, you can contribute up to £20,000 in total across your ISA accounts, without paying Income Tax or Capital Gains Tax (CGT) on the growth or interest earned. Contributions to a Lifetime ISA are capped at £4,000.
From 7 April 2027, while the ISA subscription limit remains £20,000, the maximum amount for Cash ISAs will be reduced to £12,000 for individuals aged 65 and under. As such, Stocks and Shares ISAs will become an increasingly powerful tool for maximising your tax-efficient wealth.
Any withdrawals you make from your ISAs are generally not taxed.
Pensions
You’ll automatically receive 20% tax relief on all eligible contributions to your pension. If you’re a higher- or additional-rate taxpayer, you could claim an additional 20% and 25% respectively by submitting a Self Assessment tax return or contacting HMRC.
Investments inside your pensions grow free from CGT and Income Tax. However, the Annual Allowance caps the amount you can contribute to a pension each tax year while still receiving tax relief and without incurring additional tax charges. For most people, this is £60,000 (2025/26) and it includes contributions made by you, your employer, and other third parties.
Your Annual Allowance may be lower if your income exceeds certain amounts or you’ve flexibly accessed your pension. Also, it’s important to note that you can only claim tax relief on up to 100% of your annual earnings.
From the age of 55 (rising to 57 from 2028), you can typically withdraw up to 25% of your pension pot tax-free – provided this does not exceed £268,275 (2025/26) – with the remaining 75% taxed as income at your marginal rate. As such, you’ll need to plan withdrawals carefully to keep them as tax-efficient as possible.
Get in touch
Reviewing and updating your retirement plan regularly could help you shield your wealth from inflation while ensuring it remains structured in a tax-efficient manner.
To find out how we can help, please email hello@sovereign-ifa.co.uk or call us on 01454 416653.
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 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.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Approved by Best Practice IFA Group Ltd on 17/3/26