Pension savings warning: ‘More important than ever’ to beat inflation – here’s how | Personal Finance | Finance
Inflation eats away at the real value of cash savings, and for pension savers who put aside their hard earned funds for years can often lose thousands without even realising it. James Norton, head of financial planners at Vanguard, shared exclusively with Express.co.uk how pension savers can keep their savings ahead of inflation.
Relying on cash savings is becoming less dependable, especially when saving large amounts over long periods of time.
A general inflation rate of two percent over 10 years can see £1,000 only have the purchasing power of £820 by the end of it.
After 30 years this purchasing power lowers to £552. A scary statistic especially when considering that the current inflation rate is expected to reach seven percent this year.
Mr Norton explained: “To illustrate the damage that even low levels of inflation can do to cash savings, the Bank of England’s two percent annual inflation target for the next 35 years would, in total, result in a 100 percent increase in prices over that period.
“That means £1000 of your hard-earned savings would only be worth around £500 in terms of purchasing power.
“Inflation has actually averaged 2.8 percent in the last 25 years, and recent further increases highlight why it’s more important than ever to find inflation-beating ways to maximise your retirement pot.”
The average UK adult has £61,897 in pension pots by the time they hit retirement.
This is far off the estimated £33,000 needed per year for a comfortable retirement, placing more importance on how Britons inflation-proof their savings.
Mr Norton added that it’s not only inflation fighting Britons’ retirement funds, but the cost of living and interest rates as well.
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He shared: “The cost of living in the UK rising at its fastest rate in 30 years and cash rates remaining at woeful levels has prompted many to carefully consider their retirement savings plan.”
It may seem that all the odds are stacked against Briton, but thorough understanding and timeous action can help them not only beat inflation but potentially secure the retirement they deserve.
Mr Norton said: “We believe the best chance of inflation-beating success is through a balanced, broadly diversified, investment portfolio, held for the long-term at a low cost.”
He noted that this can be achieved with a SIPP or stocks and shares ISA, saying they “can be a great way to outpace inflation”.
However, it is worth noting that every investment has capital at risk and investors are advised to not invest more than they can afford to lose.
Despite the risk, Mr Norton highlighted that it can lead to “a better return than if you were to hold your savings in cash. Assuming a five percent return after costs, a monthly investment of £200 could be worth over £500,000 after 50 years of growth”.
Due to the vast amount needed for retirement it is usually recommended to start saving earlier rather than later, but Mr Norton shared some prudent advice for those who may only have a few years before they retire.
He said: “It’s better late than never. Even if you are in your 50s, you still have an investment horizon of at least 10 to 15 years before retirement and hopefully many happy years in retirement – plenty of time to benefit from long term returns.”
He cautioned: “Regardless of when you start your pension, costs should be a key consideration. Fees and charges compound just as returns do, so the less you’re charged for these costs, the greater possibility you have of maximising your long-term returns and meeting your retirement goals.”
Delaying one’s retirement may not be ideal for many, but “can make a big difference” according to Mr Norton.
He explained that someone with a £10,000 investment and 10 years until retirement making £500 contributions per month with a five percent annual rate could get £93,471 when they retire.
However, adding just two more years onto this calculation can give this saver a total pot of £115,631.
Mr Norton concluded: “Starting a pension later in life can be daunting, but you don’t have to do it alone. A good starting point is the Money Advice Service. Those who are less comfortable making decisions alone should consider seeking expert financial advice.
“This can help to take away some of the pressure, knowing your retirement finances are in expert hands and on track to meet your retirement goals.”
