Rising inflation could halve £1m pension pot

Posted on 15 December, 2016

With inflation predicted to rise above its long term average rate in 2017, Investec Wealth & Investment is warning pension savers against overestimating the buying power of their future retirement pot.

Its research shows that half (49%) of pre-retirement pension savers aged 35 to 54 think that a pension pot of £1 million – the current lifetime allowance – in 2043 could provide a golden retirement, but taking into account the average long term rate of inflation its value would have halved in real terms.

Assuming a pension saver retires in 27 years’ time with a retirement pot of £1 million and drew an annual income of 4% or £40,000, this would be worth no more than £20,000 in today’s terms, around £7,000 less than the current average UK salary.

IW&I’s research shows that most investors have unrealistic retirement expectations. On average, workers earning a minimum of £50,000 a year are looking towards their private pension to produce almost half (44%) of their salary as income but in reality the average is around a third.

According to the research, a quarter (26%) of respondents said they expect their private pension to provide more than half their current salary, while one in 14 (7%) estimated it would match it.

Many pension savers in their 30s and 40s think a pension pot reaching the lifetime allowance of £1 million will pay for a gold-plated retirement but research suggests otherwise.

With inflation expected to continue rising, pension pots and savings in general will be worth much less in the future. Many savers tend to forget this when they’re drawing up their retirement objectives and end up overestimating how much income they will receive. As higher earners with a decent private pension tend to get around a third of their salary, this can turn out to be an unpleasant surprise.

A significant increase in the lifetime allowance limit of £1m seems unlikely in the near future, and so people looking forward to enjoying a comfortable retirement shouldn’t rely solely on their pension but instead spread their investments across other tax-efficient vehicles such as ISAs.”