Pension: Warning as rise to inflation could mean ‘disastrous impact’ for your retirement | Personal Finance | Finance
Pension saving is undertaken by many people years in advance of their eventual retirement. But as this is a form of investment, people should always be prepared to ride the peaks and troughs of inflation. Now, as Consumer Price Index inflation has more than doubled between April and May, Britons may need to brace for the impact on their pension fund.
“But significant price rises would have a disastrous impact on those taking an income in retirement – particularly if they last for years rather than months.
“Investors need to remember that, while price rises may still be relatively low at the moment, inflation expectations are at their highest level for over a decade.”
As a result, then, Mr Selby urged those saving for retirement to think carefully going forward.
He stated it was well worth considering what kind of impacts a prolonged period of higher inflation could affect future spending power.
But as he also highlighted, individuals with a high amount of their pension pot in cash will need to act particularly quickly.
Failing to do so, Mr Selby said, could mean individuals risk “locking in” to a substantial real-terms loss.
The key concern is that individuals could end up running out of money in retirement, an already expensive endeavour.
AJ Bell cited the example of a person with a pension worth £100,000, taking an income of £5,000 a year, with an assumed investment return of four percent per annum.
If inflation were to run at zero percent, then they could do this, and their fund would run out after 37 years.
But with a rise to inflation running at two percent, for instance, individuals would need to increase their withdrawals by two percent each year to maintain spending power.
This could mean their fund runs out in a much shorter time – after 25 years.
Applying the same logic to inflation rising to four percent, means funds could run out after just 20 years.
With Britons spending more of their adult lives in retirement than ever before, it is easy to see why this is a concern.
As a result, individuals may wish to plan ore rigorously towards their retirement, perhaps looking at services such as PensionWise for further guidance.
The earlier one starts on a pension savings journey, usually, the easier it will be due to compound interest.
Some, however, may wish to enlist the services of a financial adviser to offer them a more tailored approach to their retirement goals.