Much is made about the impact of inflation on the ‘real’ value of your income and investments. That is, the impact inflation has on your ability to continue affording your lifestyle.

The magic number

The Bank of England Monetary Policy Framework has an inflation target of 2%. The remit is not to achieve the lowest possible inflation rate as inflation below the target of 2% is judged to be just as bad as inflation above the target. However, this magic number masks a wide variation in the levels of inflation experienced by different groups of people as it is calculated using a basket of goods and services that’s meant to reflect the spending habits of the ‘average’ household.

Research by the UK Office for National Statistics (ONS) highlights that those who are retired, or who have lower disposable incomes, face significantly higher levels of inflation than the rate used to calculate increases in the state pension and other benefits.

In fact, retirees and students experienced the highest rates of personalised inflation with the difference widening as the rate of inflation increases. For example, in 2003 the official inflation rate was 1.4%, while that of the lowest earners was 1.5%. In 2008 the official inflation rate was 3.6%, but 4.4% for the lowest earners*.

The effect of inflation on savings

Inflation is an economic fact of life but this analysis shows that in retirement you are likely to be faced with potentially higher levels of inflation than you’re used to. Whilst the state pension currently features a ‘triple-lock’, this has not always been the case and may not hold in the future. And it only protects you from the ‘average’ level of inflation. Further, if you rely on your personal pension for ‘the little luxuries’ or even to maintain your basic expectations of a comfortable lifestyle, you will not be able to ‘grow’ this income through wage rises or by changing jobs as you may have been used to as an employee.

If the returns you get on your money are unable to at least match inflation, then your assets will effectively lose value each year. Depending on your personal circumstances, you may need an investment strategy with the potential to provide adequate real returns to address these inflationary issues. The road ahead is far from clear, but that’s all the more reason to pay close attention to how your savings are invested.

Getting advice can help you get more from your money. If you’d like to discuss any aspect of investing please get in touch with Newcastle Financial Advisers by  popping into your local Newcastle Building Society branch, booking an appointment online or calling the Newcastle Financial Advisers team on 0345 600 4330 (lines open Monday – Friday 9am – 5pm).

The value of your investment and any income from it may fall as well as rise. You may not get back the amount you originally invested.

*Office for National Statistics, 2014

Newcastle Building Society introduces to Newcastle Financial Advisers Limited for advice on investments, pensions, inheritance tax planning, and life cover. Newcastle Financial Advisers Limited is an appointed representative of Openwork Limited which is authorised and regulated by the Financial Conduct Authority. Newcastle Building Society Principal Office: Portland House, New Bridge Street, Newcastle upon Tyne, NE1 8AL. Newcastle Building Society is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Newcastle Building Society is entered in the Financial Services Register under number 156058. You can check this on the Financial Services Register or by contacting the Financial Conduct Authority on 0800 111 6768. Call 0345 734 4345 or visit us online www.newcastle.co.uk Article correct at time of publication.