Just like the price of everyday goods, the value of your pension’s also impacted by inflation. So, whilst it’s important to grow your pension to help support you in retirement, it’s also important to know just how far your savings will go once you get there. Our Inflation Calculator helps you see how your pension could be impacted.
What is inflation?
Inflation refers to the rate at which the price of everyday goods like food and fuel increases over time. It’s important to consider because it affects the purchasing power of your money. So, an amount of money you spend in the future won’t be able to afford as much as it can today. For example, if you buy a pint of milk for £1 today and inflation jumps to 10%, next year the same pint will cost you £1.10. If the rate of inflation sticks at 10%, it’ll cost you £1.21 the year after.
When it comes to your pension, as you’re dealing with a much larger sum of money, the effect of inflation’s more noticeable. For example, imagine your pension’s worth £50,000 today. To keep up with inflation and maintain the same purchasing power in 10 years, with an assumed inflation rate of 2.5% per year, you’d need to have £64,004.23 in your pot. Over those 10 years, you’d need to either contribute or have an investment growth of £14,004.23 to have the same purchasing power as today.
Knowing how inflation could impact the value of your pension at retirement will help you see if you need to make adjustments - like increasing your contributions - which could help your pension outpace inflation. That’s where our Inflation Calculator could help you.
How to use the Inflation Calculator
You’ll only need a few basic pieces of information including:
- the current value of your pension pot;
- your age now and the age you intend to retire; and
- the rate of inflation you want to see the impact of.
You can optionally add the total value of your current annual contributions.
If you need to know the current rate of inflation, you can always find it on our How does inflation affect pensions? blog under the heading ‘How inflation affects the value of goods over time’. We update this every month in line with the latest monthly figure given by the Office for National Statistics (ONS).
How the Inflation Calculator works
Once you’ve entered your details you’ll see the graph to the right update automatically with several helpful bits of information.
Projected pension pot value
You’ll see how much your pension could be worth by your retirement age in the green box. This is made up of the total value of your pensions, an assumed rate of 5% growth from your pension’s investment and any annual contributions you make.
Pension value in today’s money
Importantly, the calculator will show how much your pension will be worth by your retirement age in today’s money. For example, you’re aged 30 (in 2025) with a retirement age of 68. If you have a pension pot of £50,000 with 5% investment growth and no annual contributions then your pension pot will have £247,613 in 2063. However, with an assumed inflation rate of £2.5% then it’ll only have the purchasing power of £98,489 in today’s money.
Side-by-side: your pension’s value and its purchasing power
Move up and down the graph to see the value of your pension and its equivalent purchasing power in today’s money over various points in time between now and your retirement age.
Underneath the graph, there are a few examples of everyday goods like a litre of petrol and a pint of milk. By adjusting your retirement age and the inflation scale, you can see how much these could be worth by the time you retire.
How the Inflation Calculator can help you
Tools like our Pension Calculator will show you how much your pension could be worth by the time you retire. But it’s important to know what that may be able to afford you in retirement. The Inflation Calculator provides a better understanding of your pension’s purchasing power at retirement. This can help you make adjustments to things like your pension contributions to make up for any impact inflation will have. The calculator will tell you how much extra your pension will need to make up the difference.
How much will you need in retirement?
The answer will be different for everyone. It all depends on the kind of lifestyle you might hope to live in retirement. Things like travelling more or moving house may all factor into your decision. You may even have to consider the cost of looking after a loved one. The Pensions and Lifetime Savings Association’s (PLSA) Retirement Living Standards provide a helpful guide to how much your retirement might cost at three different levels; minimum, moderate and comfortable. Our retirement hub provides lots of resources to help you prepare for life in retirement.
Future product news
Keep your eye out for our next product blog or catch up on previous posts. We’re looking forward to spotlighting more of our handy features and free financial tools plus we’ve got lots of great new updates in the works we’re looking forward to bringing you. Once released, we’ll let you know what they are and how they can help you save for a happy retirement.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
