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One of the country’s leading pension providers is warning that inflation is continuing to “erode the value” of pension pots in the UK. In response, PensionBee has launched a new inflation calculator to assist people in learning how much their savings could be worth at retirement. Furthermore, it also estimates the future prices of everyday goods, utilities and services, taking into account the changes in inflation.
As of December 2022, the rate of Consumer Price Index (CPI) inflation is sitting at 10.5 percent.
While this is a slight drop from the month before, inflation remains extremely high relative to recent years.
Savers have seen diminishing returns on their savings despite a wave of interest rates rises by banks and building societies.
However, the public are also anxious over how inflation will erode their pensions over time, particularly during the cost of living crisis.
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With PensionBee’s latest tool, savers can see how their pots will change over time depending on the rate.
Using the calculator, it can be determined that a pension pot worth £50,000 would equate to £94,023 by 2023 without the effect of inflation.
This estimate is assuming five percent investment growth and £1,000 in contributions towards the pension pot each year.
Despite this, the net effect of an assumed 2.5 percent inflation rate means it could actually only be worth £75,208 as of today.
To reach the purchasing power of £94,023 in today’s terms, savers would need to grow the overall value of their pension pot by £18,815 over the next decade.
This would need to be done to mitigate the impact of inflation and can be achieved by making extra contributions or further investment growth.
With the latest inflation rate at 10.5 percent, those thinking about retirement may be concerned their pension pot is being eroded over time.
By 2033, a £50,000 pension pot today could be worth £33,988 in today’s money, taking into account the same assumptions regarding investment growth and annual contributions.
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PensionBee’s calculator also highlights how the cost of the price of goods and services may increase as a result of inflation.
For example, the average pint of beer costs £4.13 but this could be £61.20 by 2050 if inflation were to stay at its current level but this is significantly unlikely.
Becky O’Connor, Pension Bee’s director of Public Affairs, said pensions are a “great way of saving for the future” but warned “they are not immune from the effects of inflation”.
She explained:: “While pensions usually grow at a faster rate, inflation still has the power to erode the value of a pension pot over time, as they must stretch further to afford everyday goods and services.”
Ms O’Conner added: “As record high inflation levels are most noticeable when considering large sums of money, our new tool aims to take the guesswork out of retirement planning, helping savers navigate the impact of inflation on their pension pot.
“By arming savers with the necessary information and knowledge, we hope to encourage adequate future planning so everyone can look forward to a happy retirement.
“As always, I would urge all savers to continue making contributions to their pension where and when they can to help offset the impact of inflation to ensure their pension can last for as long as possible in retirement.”
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