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Retirees must protect long-term purchasing power as inflation reality bites

by wrich
gawdo

CPI inflation hit 2% in the year to July 2021

This compares to 2.5% in June and 1.0% in July 2020

Wage rises can mitigate the impact of inflation for workers, but retirees stuck on level incomes or those whose retirement savings are primarily in cash face erosion of purchasing power over the long term

The ONS has released Consumer Price Inflation for July 2021. You can find it here Consumer price inflation, UK – Office for National Statistics

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown:

“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 over time. Typically, workers can combat this with wage increases, but retirees risk a long-term erosion of their financial resilience if their planning neglects the inevitable reality of price rises.

HL analysis shows a £250,000 pension pot today would only be worth the equivalent of £167,000 twenty years later if inflation was at 2%. An increase to 3% would erode the purchasing power to approximately £136,000 over the same time period. The purchasing power of £100,000 would fall to approx. £67,000 and £55,000 respectively. 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 best package for a sustainable retirement hardwires in a growing income, whether through inflation linked pensions or annuities, state pensions or investment portfolios, or a combination, with a healthy chunk of cash for emergencies on the side.”

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