Many Britons have no clue how inflation affects their savings

Many Britons have no idea how high inflation is impacting their cash savings and pension pots, according to new findings seen exclusively by This is Money. 

Despite inflation being at its highest level since 1982, more than half are unaware of the impact rocketing inflation is having on their savings and pensions, research by Schroders Personal Wealth found.

Worse still, the research highlighted that three in five have no idea what interest rate their savings account is currently paying. 

No clue: Many Britons have no idea about the impact high inflation could have on their cash savings and pension pots, Schroders Personal Wealth said

More than a quarter of respondents to a survey of 1,000 people aged 18-80 admitted they were not sure how surging inflation would affect their retirement plans. 

Only 27 per cent of respondents aged 55 or over said they could still afford to retire in today’s higher inflation environment. 

Meanwhile, a combined 72.7 per cent either cannot afford to retire or are unsure if they can afford to retire. 

A quarter of people falling into these two categories believe they will now have to delay their retirement by at least four years.

The biggest worry among UK consumers is that they don’t have enough money to retire, while about 14 per cent said they did not know how long their pension pot would last. 

Taking into account all age groups surveyed, 6.2 per cent of respondents believe the biggest cost on themselves and their families would come from rising oil and gas prices.

Only 3.5 per cent recognised the impact on their savings as being the biggest cost due to surging inflation, the findings claim.

Ben Waterhouse, chief client officer at Schroders Personal Wealth, told This is Money: ‘The impact of today’s high inflation on everyday lives, retirement plans and pension pots has been significant. 

‘Worryingly, our survey shows many people are unaware of its effect on their cash savings and retirement plans.

‘It’s important that people do understand the impact inflation can have. Many may not see the true effect until it is too late and may find that their financial goals are no longer achievable.

‘There are no magic solutions to solve inflation, but we do believe that it is in times like these the need for financial advice has never been greater.

‘For those looking for help managing through the current uncertainty, now is the time to talk to a financial adviser to discuss whether they’re on track to meet their financial goals.’

The ‘SPW Inflation Watch Report’, which surveyed just over 1,000 UK adults aged between 18 to 80, focused on the thoughts, concerns and impact that rising inflation is having on UK consumers. 

Savings matter: It is vital to know how surging inflation may be eating into your savings

How does high inflation affect cash savings?

It is vital to know how surging inflation may be eating into your savings. 

If, for instance, you sign up to a cash savings account paying 1 per cent worth of interest, while you will end up with more cash a year later, it will not stretch as far as it would have the year before. 

This is because UK inflation is now hovering at just over the 10 per cent mark, and experts at investment bank Citi think it could rise to over 18 per cent in early 2023.

So, to actually make money on your savings or investments, you need to find an account that beats inflation, but this is easier said than done and can be a risky business.

Getting higher returns on cash often involves taking more risks and this will not be a prudent thing to do for everyone. 

If in doubt, seek professional financial advice before taking the plunge in your quest for higher returns. 

Think carefully about what your savings goals are and only apply for savings accounts or investments that will meet your needs and suit your risk appetite. 

How could high inflation affect your pension pot?

Rampaging inflation does not just affect people with cash stashed away in a standard savings account. Anyone with a pension pot also needs to take note.

The impact of inflation varies depending on what sort of pension you have. 

The impact of inflation on private sector defined benefit pensions will depend on the rules underpinning the specific scheme in question. Often these rules will place a cap on inflation protection, meaning they will not enjoy the same increases as their peers that worked in the public sector.

Some schemes still use RPI as the measure of inflation against which to uprate pension payments. As things stand, RPI is a whopping 12.3 per cent, and typically runs higher than CPI.

It could have meant private sector defined benefit scheme members received a CPI-busting increase, but that will be quashed if schemes apply the 5 per cent and 2.5 per cent caps typically available to them.

If you are taking income from a defined benefit pension scheme, as opposed to a defined contribution pension scheme, you will not need to worry about inflation because the amount you get is already going up with inflation, just like the state pension.

If you are withdrawing funds from an investment or defined contribution pension scheme, which is what most pensions are these days, and inflation is high or your fund has had a bad year in performance, it is crucial to review your finances, according to Aman Athwal, a financial adviser at Aviva.

Athwal added: ‘Often, a customer wants to take out a chunk of money from their pension and live off that for a bit. 

‘To stop your funds from being eroded, it’s good to keep as much of it in a place where it’s growing at least as much as inflation, and just check that it will last you the rest of your retirement.’

State pensions are set to rise substantially next year, with all eyes on September’s inflation figure, which is traditionally used to uprate benefits the following year, whenever it is higher than average earnings growth or 2.5 per cent.

If by next month inflation has reached the Bank of England’s forecast 13 per cent, the new state pension would breach £200 a week for the first time, hitting the Exchequer with an estimated £13billion bill.

This post first appeared on Dailymail.co.uk