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Inflation and how to protect against it

Inflation is the increase in the cost of living. When there is inflation, the cost of goods and services you pay for increases. 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

Example price increases over the next 10 years
Item Price as at

Sept 2024

Price in 10 years if inflation is:
1% a year 3% a year 5% a year
Eggs

Per dozen (medium size 4)

£3.26 £3.60 £4.38 £5.31
Bread

Sliced white 800g loaf

£1.40 £1.55 £1.88 £2.28
Milk

Per pint, pasteurised

£0.65 £0.72 £0.87 £1.06
Tea bags

Per 250g

£2.65 £2.93 £3.56 £4.32
Petrol

Unleaded, per litre

£1.36 £1.50 £1.83 £2.22

Correct as at September 2024.
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. Having some idea of how long you may live can help with your planning, you can find out more here.