How Inflation Destroys Your Pension (And the One Thing That Protects It)
- Alpesh Patel
- 3 days ago
- 4 min read
Updated: 11 hours ago
Your pension statement shows a number that grows every year. What it does not show is what that number will actually buy in 15 or 20 years. Inflation is the silent force that determines the answer — and most pension investors are not protected against it.
UK CPI inflation peaked at 11.1% in October 2022 — the highest rate in 41 years. Even at more moderate levels, the cumulative impact of inflation on a pension pot is dramatic. At 3% annual inflation over 20 years, a pension income of £25,000 per year in today's money requires £45,152 per year in nominal terms just to maintain the same purchasing power. A pension pot that is not growing significantly faster than inflation is quietly eroding the real standard of living it was built to support.
Alpesh Patel OBE is a hedge fund manager, Bloomberg TV alumnus, Financial Times author, and former Visiting Fellow at Corpus Christi College, Oxford. Inflation protection through equity ownership is a core rationale of the GIP framework.
The Real Return Problem: What Your Pension Statement Does Not Show
The real return on an investment is the nominal return minus inflation. This is the return that actually matters — it is the growth in purchasing power, not just in the number on a statement.
A pension growing at 6% nominal return during a year of 5% CPI inflation is delivering a 1% real return. During the 2022 inflation peak, a pension growing at 6% nominal was delivering a -5% real return - meaning its purchasing power was actively shrinking even as the statement number grew.
The practical impact over 20 years, starting with £200,000:
6% nominal / 3% inflation = 3% real return: £200,000 grows in nominal terms to £642,000. In real (inflation-adjusted) terms: approximately £356,000. Your pension feels like it doubled — but your purchasing power only increased by 78%.
13% nominal / 3% inflation = 10% real return: £200,000 grows in nominal terms to £2,387,000. In real terms: approximately £1,323,000. Purchasing power increases by 561%.
The gap in real purchasing power between a 6% nominal fund and a 13% nominal framework over 20 years is not a rounding error. It is the difference between a comfortable retirement and a retirement that quietly erodes in real terms year by year.
Why Bonds and Cash Provide the Worst Inflation Protection
The default pension lifestyle strategy used by Aviva, L&G, Scottish Widows, Nest, and most other major pension providers automatically shifts money from equities to bonds and cash as the investor approaches retirement. This is designed to reduce volatility. The problem is that bonds and cash particularly at the moderate interest rates of recent years provide the worst inflation protection of any mainstream asset class.
During the 2022 inflation surge, UK government gilts fell 25–30% in value as interest rates rose sharply to combat inflation. A lifestyle strategy that had been de-risking into gilts throughout 2021–2022 delivered both negative nominal returns and severely negative real returns simultaneously. This was the worst possible outcome: the mechanism designed to protect retirement wealth destroyed it in real terms precisely when inflation risk was highest.
The One Thing That Genuinely Protects Against Inflation: Pricing Power
The most robust long-run protection against inflation is ownership of businesses with genuine pricing power - the ability to raise prices at or above the rate of inflation without losing customers.
These businesses grow their revenues in nominal terms as inflation rises, protecting the real value of the investment even in high-inflation environments.
Pricing power is directly related to competitive advantage: the moats that prevent competitors from taking market share and allow the business to set prices rather than accept them. Strong branding, network effects, switching costs, regulatory barriers, and unique intellectual property are the most durable sources of pricing power. These characteristics are also, not coincidentally, strongly correlated with high CROCI - Cash Return on Capital Invested; which is why the first screen in the GIP framework is CROCI above 10%.
Academic research from Damodaran at NYU Stern and Asness at AQR has consistently shown that high-quality businesses with strong pricing power outperform broad equity markets over periods that include high-inflation episodes. The GIP framework’s emphasis on CROCI, cash generation, and business quality is therefore not just a return-maximisation strategy, it is an inflation protection strategy embedded in the stock selection process itself.
Practical Steps: Inflation-Proofing Your SIPP
Calculate your real return. Take your pension’s 5-year annualised nominal return and subtract the average CPI over the same period. If the real return is below 4–5%, your purchasing power is growing slowly and the fund is not keeping pace with the compounding needed for a comfortable retirement.
Check your lifestyle strategy trigger. If you are in a lifestyle or target-date fund, find out when de-risking begins and how much equity exposure you have today. If you are more than 10 years from retirement and already partially de-risked into bonds, the inflation protection of your portfolio is already being compromised.
Switch to quality equities. A portfolio of 20–30 high-CROCI, cash-generative businesses with pricing power is the most robust inflation protection available in a pension wrapper. This is precisely what the GIP Approved List identifies.
Run your pension’s real return at campaignforamillion.com/tools. For a personalised review of your inflation exposure and how the GIP framework addresses it, book a free portfolio review here.
Sources & Further Reading
ONS — UK Consumer Prices Index historical data including 2022 inflation peak. ons.gov.uk/economy/inflationandpriceindices
Bank of England — Inflation report and Monetary Policy Committee decisions. bankofengland.co.uk/monetary-policy/inflation
AQR Capital Management — Research on inflation, equity returns, and pricing power as an inflation hedge. aqr.com/insights/research
Financial Times — Inflation, real returns, and pension investment strategy. ft.com/personal-finance
Disclaimer: This article is for educational purposes only. All investing carries risk. Past performance is not a reliable indicator of future results. This does not constitute personal financial guidance.
Alpesh Patel OBE
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