How inflation affects retirement income

What inflation does

Inflation is the rate at which prices rise over time. The Bank of England explains inflation as the increase in the price of goods and services, and the UK Government sets the Bank a 2% CPI inflation target.

If prices rise, the same number of pounds buys less. £30,000 a year in today's spending power is not the same as £30,000 a year in 20 years' time if prices have risen throughout that period.

Nominal pounds and real pounds

Nominal pounds are the actual pounds shown in a bank account or pension statement. Real pounds adjust for inflation. For retirement planning, real pounds are often easier to understand because they express a future result in terms of today's purchasing power.

Why cash and investments are affected differently

Cash can be useful for emergencies, planned spending and short-term comfort. But if cash interest is lower than inflation, its spending power falls over time. Invested assets may have a better chance of keeping up over long periods, but returns are uncertain and can be weak at inconvenient times. This article does not recommend an investment strategy.

A simple purchasing-power example

Example only: a household wants spending equivalent to £30,000 a year today. If future prices rise, the future cash amount needed to buy the same lifestyle may be higher than £30,000. Looking only at nominal income can make the plan appear steadier than it really is.

How RetirementInSight uses inflation

RetirementInSight presents projections in today's money. It uses inflation as a modelling assumption, not a guarantee. Scenario outputs are deterministic projections based on chosen assumptions; they are not probabilities and they do not predict future markets or prices.

Common questions

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