The impact of inflation on your savings and pension pot

  • Bella Edmunds
  • 24 November 2022
  • 5 mins reading time

Most of us will be all too aware of how rising prices (inflation) are impacting our daily lives, from energy bills to shops to school uniforms, most items or services we purchase on a regular basis. But what many people may not understand, or may simply have overlooked, is how inflation is impacting any cash sitting in standard savings accounts, the value of fixed pension payments or the value of retirement pension pots.

Know your interest rate

Indeed, in some recent research undertaken by Schroders Personal Wealth in August 2022, out of 1,000 respondents, almost two-thirds did not know what interest rate was being paid on their savings accounts. If you don’t know this information then you can’t start to assess what impact external factors such as inflation are having on the value of your savings. (1)

For example, the current UK inflation rate is 11.1 per cent (as measured by the Consumer Prices Index (CPI)) for the year to October 2022. If the price of a car moved in line with inflation, then a car that cost £5,000 a year ago, would cost you £5,555 today. If your savings account pays 1 per cent interest (not adjusted for inflation) and you invested £5,000 a year ago, you would only be able to afford a car worth £5,050.

This is why it is so important to know how your savings are invested and whether they are on track to meet the goals you want to achieve with them.

So, just find a savings account that matches inflation, right?

Let us know if you do! Currently most standard savings accounts pay around 1 to 2 per cent interest. If you want to earn more, then there are likely to be penalties, such as having to lock-up your money for certain time periods and potentially having to pay charges if you find you need to use it earlier than expected.

If you want the potential to earn something closer to inflation this would likely involve investing in equities (shares of companies listed on a stock exchange) and other asset classes, such as commodities (gold, grain, copper etc.) or high yield bonds (fixed income products that potentially pay a higher income than government bonds but that also come with higher risks). Although as with all investments, nothing is guaranteed.

Asset classes are named for illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Do you know if inflation is impacting your finances?

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Taking advice could help to mitigate unnecessary risks

Finding an investment that aims to earn a better return than cash often comes with risk, so you need to make sure you fully understand your tolerance to risk and whether you sit at the more cautious or adventurous ends of the risk spectrum. This is where speaking to a financial adviser can be invaluable in helping to ensure you consider all the factors to reach the right investment decision for you.

Inflation risks don’t disappear when you retire

It’s not just the value of savings accounts that can be eroded by high inflation. Anyone drawing down a pension or saving for retirement needs to be aware of the impact of inflation too.

There are different types of pensions and they are affected by inflation in different ways.

The state pension links its annual increases to the Consumer Prices Index (CPI) measure of inflation, which is the most quoted measure, and the one that currently stands at 11.1 per cent. Defined benefit, or final salary, pensions can potentially also link annual increases to inflation, and in some cases to the Retail Prices Index (RPI) measure of inflation, which is typically higher than CPI. So, if your pension(s) are one of, or both, of these types, then inflation may not be an issue for you.

However, most defined benefit schemes closed to new members years ago, and so the majority of pensions now are defined contribution pension schemes. These types of pension payments do not increase with inflation, and so you need to think carefully if you want to drawdown a lump sum. There may also be options to move your pension pot to investments that have the potential to earn returns closer to inflation.

Again, talking to a financial adviser can help you explore options that are less impacted by the erosive effect of high inflation.

There could be worse to come

Unfortunately, the consensus is that inflation has not yet peaked. Inflation is expected to rise further before beginning to fall in 2023.

With predictions like these, which we have not seen the likes of for several decades, can you afford not to know how your savings are performing, or how inflation could erode the value of your pension pot?


Schroders Personal Wealth 'Inflation Watch Report', August 2022

When will inflation start to come down? | Bank of England 3 November 2022

Important information

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or part) without our prior written consent.

Fees and charges apply at Schroders Personal Wealth.

In preparing this article we have used third party sources that we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors might not get back their initial investment.

The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn't guaranteed and can do down as well as up. The benefits of your plan could fall below the amount(s) paid in.

There is no guarantee by investing money it will keep level or beat inflation, particularly when inflation is high.

Forecasts are not a reliable factor of future performance.

All information correct at the time of publishing.

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