Inflation explained

With inflation at only 3% a year for example, a £10,000 car today would more than double in price in 25 years.

The figures used here are for illustration only. Rates of inflation could be greater or less than 3%.

What this means for your retirement savings

When you start your pension plan you’ll want to make contributions at a realistic level compared to your earnings. However, if you never review your contributions, they’re likely to be woefully inadequate by the time you reach retirement.

If your planned retirement income is based on your earnings today and today’s prices, you’ll need to review this regularly. This will help to make sure that your contributions remain at a realistic level, compared to prices and your earnings.

When you retire, inflation doesn’t stop. Over the years, it could have a major effect on the buying power of your retirement income.

With inflation at 3% for example, in ten years time, the value of £1,000 worth of pension will fall to around £740 in today’s terms. After 20 years, it will be worth around £540.

The figures used here are for illustration only. Rates of inflation could be greater or less than 3%.

What you can do

Ideally, you should plan for a pension that gives you some element of inflation proofing. This means having enough money in your pension pot when you retire to buy an annuity that meets your needs then and gradually increases over time.

An increasing annuity costs more than a level one. Making sure your retirement savings remain realistic, gives you a better chance of beating inflation.