Inflation is the increase in the cost of living. When there is inflation, the cost of goods and services you pay for increase. Continued increases in inflation over time affect how much the pound in your pocket is worth and what you can buy with it.
The above image is a simplification of inflation, so let’s have a look at some examples of things you may commonly buy:
Example price increases over the next 10 years
Item Price as at
April 2021 Price in 10 years if inflation is:
1% a year 3% a year 5% a year
Eggs
6 Free Range Eggs – Medium (size 4) £1.69 £1.87 £2.27 £2.75
Bread
Sliced white 800g loaf £1.08 £1.19 £1.45 £1.76
Milk
Per pint, pasteurised £0.42 £0.46 £0.56 £0.68
Petrol
Unleaded, per litre £1.98 £2.19 £2.66 £3.23
Correct as at April 2021. Source: wtw.bz/ons-inflation.
Measures of inflation
The two main measures of inflation are RPI (Retail Prices Index) and CPI (Consumer Price Index). The difference between the two varies from year to year but, on average, CPI tends to be lower.
Protecting against inflation
If you take your pension from the Scheme, certain parts of your pension can increase each year to provide some protection against the rises in the cost of living.
If you transfer your pension out of the Scheme, the level of inflation protection will depend on the option you choose.
Some of the options will not have any inflation protection. For example, if you were to buy an annuity, you can choose whether or not it increases in value each year.
If you choose the drawdown option or to take all of your transfer value as cash, it’s up to you to manage your money to ensure you can afford to buy the things you want and need in retirement before your savings run out.