Inflation is the rise in prices for goods and services over time. Everyone remembers a heyday of their youth when the prices paid for items were a fraction of what these items cost today. This is inflation in action.

Inflation can have an impact on your pension in that inflation will erode the real value of your pension as costs rise over time.

As inflation leads to an increase in the cost of living, good retirement planning is crucial to ensure that your pension will continue to provide sufficient income to fund your retirement plans.

The National Pension Helpline can help you with free and impartial information and services to plan your retirement income online or over the phone with 24/7 customer support.

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Example of how inflation affects your pension

What is a pension of €50,000 in 2000 worth today? 

It may be worth a lot less than you think as this example will demonstrate.

To show how inflation can erode the real value of your pension over time, here is a simplified example of how inflation can affect the purchasing power of an investment over a certain period.

An investment of €100 is made monthly for 25 years in an investment fund with a medium growth rate of 5%.

Following the 25 year investment period, the fund will be worth approximately €55,700 after charges.

  • If inflation stands at 2% over the time period, the purchasing power of the investment return of €55,700 will be €34,000.
  • If inflation stands at 4% over the time period, the purchasing power of the investment return of €55,700 will be €20,900.
  • If inflation stands at 6% over the time period, the purchasing power of the investment return of €55,700 will be €13,000.

It is easy to translate this example to the value of your pension pot over time and see that it is essential to allow for the effects of inflation over time when planning your retirement finances.

How much is your pension worth today

Pension planning to counter inflation

Your pension may be the largest asset you own, aside from your home, but inflation could have a significant impact on the purchasing power of any lump sum on retirement or your annual retirement income.

The State pension is usually adjusted over time to allow for the effects of inflation, however, if you have an occupational or personal pension these may vary in the level of protection they offer against the effects of inflation.

You will likely have little control over how an occupational pension is invested but personal pensions, or private pensions, offer more choice and control in terms of how much you contribute and how the funds are invested.

Any investment strategy should take into account your tolerance for risk and your intended retirement timeline as well as your retirement income goals.

As your pension investment fund is a long term investment fund, it can be invested in equities, property, or other assets, and will generate a return over time. Diversifying assets should protect your pension from the effects of inflation. 

The allocation of types of assets and the level of risk involved may change depending on your preference for risk and how close to retirement you are, for example. The long term nature of a pension as an investment should mean that a well managed fund will grow over a very long time period allowing your pension to provide a good retirement income despite inflation.

Maximise pension contributions

Everyone has seen the effects of inflation on the cost of living in recent years, with higher energy bills, rent and mortgages, and everyday bills such as groceries all seeming to make contributing to a pension an unattainable goal.

In order to ensure that you have sufficient income in retirement it is a good idea to maximise your pension contributions in order to benefit from the income tax relief available for doing so.

You are effectively boosting the value of your contributions by 40%, if this is your higher rate of income tax, if you are contributing up to the maximum salary percentage (or annual limit) allowed by age. 

In order to generate a retirement income which meets your requirements and allows for the effects of inflation, it is worth maximising your pension contribution as a tax efficient way to save.

As pensions also grow tax free over time, the earlier that you start to contribute to a pension, the more your fund will grow to provide you with a higher retirement income and offset the effects of inflation. 

If you start to contribute to your pension later in life, you will have to contribute significantly more to have the same ‘pension pot’ on retirement.

There are many benefits to having savings on deposit in case of a rainy day. However, relying on cash savings as a way to provide a retirement income may not be the best strategy,

With deposit rates being very low, where there are high levels of inflation the real value of cash deposits will quickly fall over time.

As well as missing out on investment growth, cash deposits are not tax efficient as they do not benefit from income tax relief or the tax free growth that pension investments enjoy.

Get financial advice today

A qualified financial advisor can help and advise you on whether your current pension provision is in alignment with your retirement plans and needs and is sufficient to allow for the effects of inflation over time.

Whether you have questions about your current pension provision or you have yet to start saving for retirement, the National Pension Helpline can help you navigate the complexities of pension planning. 

Fill in our online assessment and get a free pension consultation with a pension assessment or a full pension review or just browse our website for advice and information on all aspects of pensions and retirement planning.

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