What's inflation got to do with my savings?
Inflation is the rise in the cost of living, and right now it’s high, especially food prices which have seen a double-digit percentage rise over the last year. When inflation is high and prices are rising, it’s clear to see how it affects us today. But, what’s the impact on your future money? Here’s a quick look at what inflation is, and what you can do to protect your future income.
Give me the highlights:
What exactly is inflation?
It’s the difference between the cost of stuff today compared to last year. For example, if something was £100 last year but costs £105 today – inflation is 5%.
In reality, the Government measures lots of things (or a ‘basket of goods and services’) to get a feel for average price rises. The Retail Prices Index (RPI) and Consumer Prices Index (CPI) are two measures they use which include slightly different things in their basket. CPI is the most commonly reported one.
What causes inflation?
Anything that makes it more expensive to make products or provide services (locally or globally). Things like rising wages and energy bills, pressures on the supply of raw materials or labour, raising costs, political uncertainty, and even the weather.
Will inflation always be high?
Inflation goes up and down over time (sometimes really long periods of time). In March 2023, UK inflation was around 10% but before this it stayed at 2% to 3% for decades. The Bank of England currently predicts inflation will fall within the year (p.s. this means that prices rise less fast – not that they will reduce).
Remember, the aim of investing is to grow your money over the longer term, so some years your savings may go down in value.
What's the impact on your money?
As things cost more each year, each pound in your pocket buys you less. When you think about how long you could be building up your DC Plan savings for – 20 or even 30 years – inflation, even if it’s low, really starts to take its toll.
For example…
If you’d bought goods and services worth £100 in 1993, it'd cost you double (£200.77) to buy those same things 30 years later – your spending power has fallen by half!
Try for yourself – this Bank of England inflation calculator lets you see inflation in the UK and its impact over time.
There are things you can do:
To help ensure your money buys at least as much in the years ahead as it does today, you need to find ways to try to grow your DC savings over time. This might mean contributing what you can, when you can to boost your final savings pot. (As an added bonus, ITV helps you save and you get tax relief on your savings.)
You can also be smart about how you invest your DC Plan savings, ensuring your choices suit your circumstances. For example:
- If you’re a long way from taking your savings, you probably want to invest in options that aim to grow your savings. If your savings at least keep pace with inflation, then you’re protecting the purchasing power of your money.
This may be a stretch during times of high inflation, like now, but over the years, hopefully it will balance out.
- If you’re closer to retiring, consider how you’ll use your DC savings. For example, if you’re looking to buy an income for life (an annuity) or take any tax-free cash as soon as you retire, you might be less concerned with the short-term effects of inflation. Instead, you may prefer to invest in funds that match your plans (like bond or money market funds). If you’re planning to leave your money invested after you retire (possibly for a long time) you might need to consider funds that aim to grow your savings (to at least keep pace with inflation).
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