Inflation is a normal occurrence within a growing economy, but without forward planning, it can also erode your later-life income – particularly if you hold much of it in cash.
After the peak of the pandemic subsided, inflation began to rise throughout the UK, US and Europe. Here in Britain, inflation peaked at 11.1% in October 2022 before beginning to gradually decline again. According to the Office for National Statistics (ONS), inflation stood at 6.7% in the year to September 2023.
Yet even when inflation hasn’t been rising sharply, as it has done in the past two years, it can still deplete the real-terms value of your retirement fund over time. The Bank of England (BoE) has set a target inflation rate of 2% – and if this remained steady throughout your retirement, your wealth’s spending power could be significantly diminished over time.
Indeed, an example offered by Nest Pensions shows just how detrimental inflation can be for your cash. If you put £10,000 in savings today, and inflation remained at a consistent 2.5% rate for the next 25 years, your money would be “worth” just £5,394 in 2048.
Fortunately, keeping a significant portion of your wealth invested throughout your retirement can help keep the effects of inflation at bay.
Although there is some risk involved with investing, equities typically outpace the rate of inflation over the long-term – so remaining invested, rather than drawing your entire pension in cash at the start of retirement, could be constructive.
