New pension calculator shows what the 10.4% inflation rate means for your retirement

Pension calculation concept, old hands counting finances on a home calculator , close- up

While the UK’s high inflation rate continues to erode the value of savings pots, many Britons may be conscious of what it might mean for their pensions. To help with this, PensionBee has launched a new inflation calculator, which enables users to check how much their pension savings could be worth in retirement, based on real-time data.

To use the tool, savers simply input their current pension pot value and apply an annual rate of inflation, as well as a static yearly contribution amount, to discover how much their pension could be worth at retirement.

Without the effect of inflation, the calculator estimates that a pension pot currently worth £50,000 could equate to £88,350 by 2033, assuming five percent investment growth, 0.7 percent annual pension fees and £1,000 in contributions each year.

However, the net effect of an assumed 2.5 percent rate of inflation means it could actually be worth just £70,615 in today’s money.

As an example, PensionBee experts said: “To maintain the purchasing power of £88,350 in today’s terms, a saver would need to grow the overall value of their pension pot by £17,735 over the next 10 years to offset the effect of inflation through either additional contributions or further investment growth.”

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To illustrate how much the continuation of the current inflation rate (10.4 percent) could erode a pension pot over time, the calculator shows that by 2033, a £50,000 pension pot today could be worth £34,303 in today’s money, taking into the account the same assumptions regarding investment growth, annual pension fees, and annual contributions as above.

The calculator also indicates how the price of everyday goods could rise in the future based on different inflation rates.

For example, it shows the average pint of beer (£4.13) could cost a staggering £11.11 by 2033 if inflation were to remain at 10.4 percent each year, however, this is highly unlikely.

Becky O’Connor, director of public affairs at PensionBee commented: “People may have been hoping for some light at the end of the tunnel of ever-increasing inflation, so this month’s inflation data will be disappointing.

UK Inflation rate graphic

“High inflation is hard to cope with day-to-day, but if you are also trying to build long term wealth, it makes it even more difficult to meet your future goals for retirement. Pension saving becomes an uphill battle in times of higher inflation.

“Against this backdrop, people need iron will and discipline to take positive steps with their pension, like increasing contributions. Not only is it harder to find the spare cash to make contributions, it also makes it harder to generate a ‘real’ return above inflation, so your money still has purchasing power when you need it later on.”

For pensioners, the rise in the state pension in a few weeks, from £185.15 to £203.85 a week for the full new state pension and from £141.85 to £156.20 for those who receive the full basic state pension, cannot come soon enough.

Ms O’Connor added: “For anyone already drawing an income, coping with inflation on a finite pot of money is a difficult and stressful slog.

Chancellor Jeremy Hunt took to the despatch box to deliver the Spring Budget 2023, hailed as the “budget for growth”. In view of delivering on Prime Minister Rishi Sunak’s five key priorities, the Treasury head brought huge changes to the pension tax system, childcare benefits, corporation investment allowances and much more. But what does all this mean for you?

See how your personal finances are likely to be impacted using our calculator HERE.

“A full state pension and average private pension pot should be enough to cover the basics in life, like food and heat. But with inflation continuing to go the wrong way, covering the basics remains a challenge for all, but particularly those on low, limited incomes.”

The Bank of England announced today that the Base Rate will rise for the eleventh time to 4.25 percent in an effort to help curb the UK’s staggering inflation rate. This move could however come as better news for pension savers.

Paul Bucksey, chief investment officer at Smart Pension, commented: “The Bank of England raised interest rates today as it continues to fight inflationary pressures.

“There are likely to be some important knock-on effects to people saving in defined contribution pensions, which people close to or in retirement should be alert to. Further nervousness about the banking sector could have a knock-on effect on the values of equities and bonds, which the majority of pension savers are invested in.”

Mr Bucksey said that those close to or in retirement could end up with an unwelcome fall in the value of their pension pot, which in turn could reduce the amount of income they can take.

On the other hand, he noted that rising interest rates will be “good news” for those who are thinking of using their retirement savings to purchase a guaranteed income in the form of a lifetime annuity.

Mr Buckey explained: “Annuity rates improve when interest rates increase and annuity rates are at their highest for over a decade.”

He continued: “We urge those close to or in retirement to take a really close look at all of the investment choices available in their pension and decide whether their pension savings are invested appropriately.

“Are they taking enough risk, or too much? If they are taking a flexible income from their pension pot, do they need to reduce the amount they are taking if their pot has fallen in value?”

Pension calculation concept, old hands counting finances on a home calculator , close- up