Retirement shock as £250,000 pension pot today faces erosion to worth of just £167,000

Expert gives cash savers tips to beat inflation

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The newest inflation figures have come out below forecasts, but analysis by Hargreaves Lansdown has shown even modest inflation can take a big chunk out of people’s hard-earned savings.

The Bank of England (BoE) recently revealed the Consumer Prices Index (CPI) measure of inflation fell to two percent in July this year, falling just below the 2.1 percent forecast.

This compares to 2.5 percent in June and is the first time the rate fell to the BoE’s two percent target in two months.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “While the rate of inflation is widely predicted to peak then fall, it’s a stark reminder that its relentless creep upwards will take a real chunk out of the spending power of retirement income over time.

“Typically, workers can combat this with wage increases, but retirees risk a long-term erosion of their financial resilience if their planning neglects the inevitable reality of price rises.”

Analysis by Hargreaves Lansdown showed that a £250,000 pension pot would fall in value to £167,000 in 20 years in an environment of two percent inflation.

Despondent

Pension savers risk having their funds wiped out by inflation (Image: Getty)

A three percent inflation rate would erode purchasing power to just £136,000 over the same period.

Purchasing power of £100,000 would fall to roughly £67,000 for inflation at two percent and £55,000 for inflation at three percent.

Ms Morrissey said: “Retirement can last 20 years or more, care needs to be taken that what is affordable early in retirement does not become unaffordable later.

“The best package for a sustainable retirement hardwires in a growing income, whether through inflation linked pensions or annuities, state pensions or investment portfolios, or a combination, with a healthy chunk of cash for emergencies on the side.”

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Experts have warned that the dip in inflation will be only momentary, so could shoot back up, giving some savers reason to worry.

BoE forecasts have predicted inflation rising to four percent by the end of the year, double the target.

Given the erosion to purchasing power caused by lower rates of inflation, a four percent rate could be cause for concern.

They face little protection from inflation as interest rates remain at historic lows.

This means that savers will continue to see their funds drop in value year-on-year.

The BoE doesn’t expect the rate of inflation to return to the bank’s target of two percent for another two years.

According to the Office for National Statistics (ONS), which measures inflation, the dip in inflation was driven by price falls in clothing and footwear.

This “largely offset” price rises seen in transport, the ONS said.

But with interest rates at historic lows, inflation in whatever form will give some savers cause for concern.

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