The impact of inflation - yikes!

BookerDeWitt

I retired 5 and a half years ago at 60. Since then I've been drawing on a private pension for income. Looking at purely numerical values my pension and savings have increased by a little over 31% in that period. I decided to see what impact inflation has had and…wow.

Using CPI I'm worse off, using CPIH I'm treading water. I suppose I shouldn't be surprised given that I've had nothing coming in but it's still surprising to see how inflation eats away at savings over a relatively short period of time.

Now I'm 66 I'm just starting to receive income from my last employer's pension (just got the lump sum) and I get my state pension later this year so hopefully this will boost things up a bit.

Inflation is one of those things I was aware of but didn't really understand until I did the sums, I'm glad I know now.

El_Torro

Yes, inflation plays a big factor in the long term. That's why people keeping banging on about shortfall risk when they see that others have too much cash and not enough investments.

It's worth remembering as well that in the last 5 and a half years we've had the impact of a global pandemic on our economy. Or to put it more accurately: the furlough schemes that the UK and many other countries had in place helped push up inflation and not really help productivity.

Andy_L

BofE calculator says cumulative inflation of 27.6% since 2021, so youre very slightly ahead

https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator

Is your increase of 31% despite taking money out to live on?

Cobbler_tone

TBF that normally applies if you are working or retired. Not many employees have the luxury of tracking inflationary pay rises.

websterj

It's quite an eye opener when you actually work it out isn't it. I think the danger is looking at the balance and seeing that it's gone up, without considering what that money can actually buy compared with 5 or 6 years ago.

31% growth while you've also been drawing an income doesn't sound too bad though! With your other pension and state pension starting soon, hopefully you'll be in a much more comfortable position going forward. All the best.

DRS1

What is interesting to me is that CPI has been higher than CPIH. Because CPIH is replacing RPI in 2030 and because RPI tends to be higher than CPI I had assumed (slap on the wrist) that CPIH would be higher than CPI. So all those RPI linked annuities might not keep up with CPI after 2030? I am hoping this is a blip.

BookerDeWitt

https://forums.moneysavingexpert.com/discussion/comment/82106553#Comment_82106553

Hmm, thanks, I need to check my calculations. Between the two of us I expect that the BofE is correct! Yes, the numbers are up 31% even allowing for my spending so I guess I can't complain (I don't spend much though, I'm not one for cruises!).

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82106570#Comment_82106570

The last 5 years were very unusual in that at the beginning of the period, inflation was <1% and today is 2.8%.

However there was a big spike in the middle, due to Covid related issues, like global supply chain bottlnecks amongst other things.

During the previous 5 years, inflation only went up only about 6%.

poseidon1

Unpredictable and lumpy inflation is a partial reason I have been attempting to grow investment income, and Sipp pot since retiring 11 years ago ( Sipp remains untouched).

It's my view that one has no idea what external macro economic shocks will do to domestic UK inflation, other than the country has very little resilience to protect its citizens from these external influences ( the current Iran war being the latest case in point).

With no DB pensions at all, and state pension as sole source of 'guaranteed' income I considered it entirely unwise ( in my case) to embark on a process of 'decumulation' rather than accumulation for the forseeable future.

hugheskevi

Inflation in conjunction with fiscal drag is the real killer.

Even a fully inflation-linked DB scheme is losing real-terms value by 20% of the rate of inflation each year (assuming a basic-rate taxpayer). Based on current announcements, that is compounded over the 10-year period of fiscal drag and so one year in isolation might not be much, but over the whole period it is a significant real-terms loss. Many DB schemes have capped indexation so didn't even keep pace with inflation in the worst years, even before fiscal drag took another bite.

The high returns on DC pensions in recent years, combined with many retired and newly retiring having DB pension instead of or in addition to DC, as well as Triple Lock, have protected many. But a future with a period of poor DC returns, more fiscal drag, a diminished Triple Lock, and less DB pension around will be a lot more painful and may expose those who have not adequately planned.

michaels

So in theory your pot could fall by about 3% in real terms PA and still last long enough but there is obviously no expectation that such declines will be smooth.

For the OP if part of their pot was in reality a bridge to DB and State pension then there is no problem for this bridge to also have been spent, so in reality they are well 'ahead' of average performance.

However the substantive point is that money illusion is a real issue and those who simply monitor their pot in cash terms each year are certainly ignoring reality.