Inflation remained at 8.7 percent for the year to May, eating into the value of pensions and other savings.
Britons may be tempted to reduce their pension contributions as they need the money now to cover the rising cost of living, but an expert has urged people to continue to set aside money for their pensions.
Becky O’Connor, director of Public Affairs at PensionBee, told Express.co.uk: “Pensions are designed to beat inflation over the long term and they generally do because of investment growth.
“However, they aren’t immune to the impact of inflation, and if your pension value doesn’t happen to grow at a time when inflation is relatively high, this could decrease your purchasing power, which over time could mean that your pension savings might not get you as far as you’d hoped.”
She said a 60-year-old with a pension pot worth £41,000 could see this grow to £42,763 in a year, if they had five percent investment growth and made no more contributions.
But with the rate of inflation currently outpacing this at 8.7 percent, their pot would actually be worth £39,196 a year from now in real terms.
They would need to contribute or get extra growth worth £3,567 over the year for their funds to have same purchasing power
However, Ms O’Connor said that although it may look scary to see a pension pot shrink in real terms over the course of a year due to inflation, it will grow in real terms over time.
Another concern for pension savers is the ongoing rising cost of living, with many household bills increasing from April.
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Ms O’Connor encouraged people tempted to slash their private pension contributions to continue to chip in funds.
She said: “While it can be tempting to stop contributing to your personal or private pension, a sensible alternative may be to consider reducing the percentage of your contribution rather than stopping altogether.
“Even if retirement seems a long way off, the small amounts paid each month now will go a long way in the long term due to compound interest and investment growth.
“Make a note to review and increase your contributions once again when you feel less stretched.”
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She also said people may want to check if they can claim Universal Credit, a benefit that supports people of working age on low incomes.
People on the benefit are also receiving a £900 cost of living payment this year, which is going out in three instalments.
The first £301 instalment has already been paid with the second £300 payment to go out in autumn 2023 and the third £299 payment to go out in spring 2024.
Another key factor for people planning their retirement finances is the state pension. The full basic state pension is currently £156.20 a week while the full new state pension pays £203.85 a week.
Ms O’Connor said: “Those who are eligible for the full new state pension receive an annual income of around £10,600.
“While this alone is not enough to fund your retirement, when combined with personal and workplace pension savings, the state pension may help you reach the £23,000 per year that the Pensions and Lifetime Savings Association indicate is needed for a ‘moderate’ retirement for an individual.”
A person who has gaps in their National Insurance record can voluntarily pay contributions, which may increase their state pension payments.
An individual can check how much state pension they are on track to receive using the state pension forecast tool on the Government website.
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