Helen and Patrick, retired, Exeter
Helen and Patrick live on a defined-benefit pension of £18,000 a year. The scheme rules in this story lift the pension with CPI, capped at 5% in any one year. They also keep £40,000 in cash accounts. They own their house outright. They have no buy-to-let and no linker portfolio. They are not you.
Imagine a year in which CPI is 10% and their own basket — mostly food, energy, and insurance — feels closer to 8%. The pension does not rise by 10% or by 8%. It rises by 5%, because that is the cap. The phrase on the old scheme booklet, “inflation-linked”, was never a promise to match unlimited CPI. The missing 5 percentage points, in this illustration, is about £900 of pension they do not receive that year. Next year’s starting point is the capped figure, not the uncapped one, so the gap can persist.
Their cash earns, in this story, 3% before tax. Against an 8% personal basket, the balance would need something near 8% after tax merely to stand still in the supermarket. It does not. The cash is still what they will use if the roof fails in March. Selling a hypothetical equity fund in March to pay a roofer would be a different risk. They have chosen, without glamour, to pay for that option with lost buying power.
The lesson is the cap. If you do not know whether your own pension increase is uncapped CPI, CPIH, RPI, or limited price indexation at 5% or 2.5%, you do not yet know what you have. The scheme administrator does. We do not.
Priya, 34, renting in Bristol
Priya rents a flat. She keeps four months of rent and essential bills in an easy-access account. She also pays into a stocks and shares ISA that she has told herself she will not touch for ten years. Her employer pension is defined contribution. She has no rich uncle and no family home to move into.
In a 2022-shaped year, two things happen together. Her ISA falls in price because markets reprice yields. Her landlord raises the rent at renewal because the local market allows it. A headline that says “own equities, they hedge inflation in the long run” is not a lie about a twenty-year horizon and not a help on the Tuesday the renewal letter arrives.
The cash fund is what lets her pay the new rent without selling the ISA at the low. The ISA is not “wrong”. The time horizon was part of the hedge, and she almost violated it. Four months was her number in this story because that is what she could save, not because four is magic. A reader with a less secure tenancy might want a different number. A reader who copies four months without looking at their own notice period has copied the fiction.
The lesson is horizon. An asset that might defend purchasing power over twenty years can be a poor defence over twenty months. Cash that loses the inflation race can still be what keeps the long asset long.
Owen, one flat near Newton Abbot
Owen owns a single rental flat near Newton Abbot, with a tracker mortgage. The rent is reviewed once a year. The mortgage payment can change whenever Bank Rate changes. He thinks of the flat as his inflation hedge because “rents go up”.
In this story Bank Rate rises quickly. His payment rises the following month. The tenancy still has seven months to run at the old rent. The local market, when he does review, will only bear part of the increase he hoped for, because tenants have their own wages and their own ceilings. For those seven months the “hedge” is an asset with sticky income financed by floating-rate debt. The gap is met from his salary.
If he had a fixed-rate mortgage, the payment would not have jumped, and he would have been paying for that freeze through the rate he accepted and any early repayment charge. That is not automatically better. It is a different mismatch. The building did not become a linker just because people call property a real asset.
The lesson is matching. Income that reprices annually does not hedge a liability that reprices monthly. Leverage can amplify the inflation story you wanted into a cash-flow story you did not.
What we will not add
We will not give these characters a winning trade in the final paragraph. We will not show a chart in which one portfolio “would have” survived 2022, because a backtest on invented people is theatre. If you recognised your own mortgage in Owen’s, or your own scheme booklet in Helen’s cap, take the mechanism to a regulated adviser and to the actual documents. Leave the names here. They were never real.
Background reading: gilts, real assets, cash and wages, the playbook.