Pensioners warned inflation can still wipe out retirement savings
Finance: Expert discusses impact of inflation on a savings account
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The Consumer Prices Index (CPI) measure of inflation fell to two percent in the year to July, it was revealed today.
This compares to 2.5 percent in June and is the first time the rate fell to the BoE’s two percent target in two months.
It is marginally less that the 2.1 percent forecast by the BoE.
Analysis from Hargreaves Lansdown has demonstrated the power of long-term inflation to wipe out pension pots.
It showed that a pension pot worth £250,000 today would fall to the equivalent of £167,000 in 20 years if exposed to inflation of two percent.
The pension pot would be eroded to the equivalent of £136,000 if inflation was at three percent.
A pension pot of £100,000 would see its purchasing power reduced to £67,000 under an inflation rate of 2 percent and £55,000 for three percent.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “While the rate of inflation is widely predicted to peak then fall, it’s a stark reminder that its relentless creep upwards will take a real chunk out of the spending power of retirement income.”
The problem for pensioners is that if their savings are held in cash or they are stuck on level incomes then their purchasing power could be sharply eroded over the long term.
For workers, on the other hand, wage rises can mitigate the hit of inflation.
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Ms Morrissey, said: “Retirement can last twenty years or more, care needs to be taken that what is affordable early in retirement does not become unaffordable later.
The BoE forecasts inflation to climb up to four percent by the end of the year, double the two percent target.
Given the erosion to purchasing power caused by lower rates of inflation, a four percent rate is certainly a cause for concern.
They face little protection from inflation as interest rates remain at historic lows.
This means that savers will continue to see their funds drop in value year-on-year.
The BoE doesn’t expect the rate of inflation to return to the bank’s target of two percent for another two years.
According to the Office for National Statistics (ONS), which measures inflation, the dip in inflation was driven by price falls in clothing and footwear.
This “largely offset” price rises seen in transport, the ONS said.
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