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Pension warning: Britons urged to consider 'safest and cheapest way' to beat inflation

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The Bank of England has warned the UK risks being plunged into the longest recession in 100 years after it pushed up the cost of borrowing to three percent in the biggest single interest rate rise since 1989. The 0.75 percentage point increase has not been enough to mitigate the double-digit inflation, so the Bank has cautioned further action may be needed.

The Bank now expects inflation, which hit 10.1 percent in September, to peak at 11 percent by the end of 2022.

Journalist Robin Powell and Jonathan Hollow, a former Government Money and Pensions Service worker explained what a recession means for one’s pensions and investments.

They spoke exclusively to Express.co.uk and said: “If you have a guaranteed ‘defined benefit’ pension, inflation could erode its long-term value, but a recession alone is unlikely to have a big impact.

“If you have an investment-based pension (these are technically called ‘defined contribution’ pensions), its value is likely to fall during a recession.

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“However, if you are not spending it, its value could easily recover. Don’t be afraid of ups and downs before you actually spend your pension.”

When the stock markets fall, this means shares are cheap to buy.

The pair explained that it may seem odd, but a recession “can be a really good time” to buy more shares for one’s pension, if they do it at a steady pace.

They added: “You will get your new shares at a steep discount, and there’s a good chance they will grow in value when the recession ends.”

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Interest rates are rising, so if one’s cash is in interest-beating accounts, it pays to shop around and see if people can get a better rate.

Currently, interest rates right now are well below the rate of inflation, so even though a five percent interest rate may sound appealing, if inflation is at 10 percent, an individuals cash is still declining in value.

Mr Powell and Mr Hollow said: “If you are investing for the long term, you could put your money in assets more likely to beat inflation: for example, index funds.

“These give you a tiny slice of lots and lots of different companies – all over the world, if you want.”

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For novice investors, they explained index funds could be the safest and the cheapest way to beat inflation over the long term.

However it should be noted nobody can guarantee that someone will beat inflation, especially over short periods.

Mr Powell and Mr Hollow explained the long-term records (from 1900–1921) show that investing in equities gave a return of 5.4 percent above inflation.

Index funds are designed to give people the average return for a given market – and by their design, they always will (minus any fees).

They said: “They always rise when the market rises, and they will fall when it falls.

“But they also offer lower fees than their alternative: “actively-managed” funds that try to beat the market, through clever investment techniques and timing.

“While you can’t control market movements, you can control your fees.

So index funds offer a combination of cost-effectiveness and investing effectiveness that alternative approaches struggle to beat.”

Britons should always be aware investment is not a suitable option for everyone, so it important to undertake research.

Capital is at risk, and people could get less back than they originally put in.



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