Inflation is when prices go up and so your money buys less. Over a long period of time, for example, whilst you are making contributions to your retirement fund or when you are retired, this can have a massive impact on your savings.
Over the last twenty years, inflation has averaged 2.5% each year. Over a longer period, the figure is higher. If that average inflation rate of 2.5% each year continues in the future, a net income of £25,000 now will need to grow to £32,000 in 10 years, £41,000 in 20 years and £52,000 in 30 just to have the same buying power as today.
same buying power after inflation
It works in reverse for any lump sums. If you decide to take your retirement fund of £50,000 today as cash, and don’t invest it further, in 10 years, it would only be worth £39,000 and in 20 years, £31,000. As most people live for more than 20 years in retirement, this is something you need to think about. Holding your fund in Cash over the long term will mean your buying power will diminish significantly.
reduced buying power after inflation
Cheviot targets returns above inflation to make sure the real value of your fund is protected. This is just as important after retirement so the Retirement Planning option also targets a return above inflation. It is also why the cash fund is only suitable for short term investments because otherwise the value of your fund will reduce in real terms.
The information on this page does not represent financial advice and the Trustee strongly recommends that members take independent financial advice in connection with decisions relating to their pension fund.
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