How retirement pots risk running out 11 years early if inflation remains high

With inflation still well above the Bank of England's 2% target, there is now an increasing risk that over 50s could see the value of their pension pot erode, leaving them with an 11 year shortfall.

The Consumer Price Index (CPI) measure of inflation currently sits at 3.6%, after slowing for the first time since May, offering some relief to households.

But prices are still rising well above the Bank of England’s 2% target, which could chip away at the value of retirees’ pension pots in later life, new analysis shows.

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Financial services firm Fidelity compared two inflation scenarios for a typical UK saver - a 55-year-old woman earning £3,500 a month after tax with a £300,000 pension, contributing 15% of her pre-tax salary.

If inflation stayed at 2%, she could retire at 67 and expect her savings to last until around age 96.

However, should inflation stay at the current rate of 3.6%, it would erode the value of her money over time and her pension would run out by age 85 - 11 years earlier.

Marianna Hunt, personal finance specialist at Fidelity International, said: “Inflation is one of the biggest long-term risks to retirement savings, yet it’s often underestimated.

“It’s vital that savers stress-test their retirement plans to ensure they’re built to withstand higher prices for longer.”

The analysis comes alongside separate research from Fidelity which found 35% of UK adults aged 50 and over are facing a retirement income shortfall of at least 10 years when comparing expected savings against average life expectancy.

Check out everything you need to know about the different types of pensions in our guide.

How to top up your retirement pot

If you think rising prices could impact your retirement pot, there are things you can do to inflation-proof your savings.

Maximise your pension allowance

If you’re still in work, make the most of your annual pension allowance, which is £60,000 for the current financial year.The annual pension allowance is the maximum you can add into your pensions and still benefit from tax relief.

“You can usually contribute up to £60,000 per year and still receive tax relief at your marginal rate - 20%, 40%, or 45%,” Hunt said.

You can also carry forward unused allowances from the previous three years. Use the gov.uk calculator to see if you have any unused allowances.

Use salary sacrifice

While salary sacrifice is under the microscope with changes reportedly being considered as part of the Autumn Budget, it can be a great way to boost your income if the option is open to you.

“Paying into your pension via salary sacrifice reduces your gross salary in exchange for pension contributions, meaning you’ll pay less income tax and National Insurance. Some employers also invest their own NI savings into employees’ pensions,” added Hunt.

Top up your state pension

Under the new state pension, you need 35 years’ National Insurance contributions to qualify for the full amount, currently worth £230.25 a week.

If you have gaps in your record, you can make voluntary contributions. Yes, you have to front up the costs of filling the gaps, but you’ll benefit from your pension rising every year under the triple lock, which Rachel Reeves has said she is committed to.

Each extra qualifying year adds to your entitlement, which rises each year under the triple lock - by inflation, wage growth, or 2.5%, whichever is highest.

Work for longer

If you’re able-bodied and up to it, working for longer can significantly boost your retirement pot, by giving any contributions and investments longer to grow and by shortening the period you’ll need to draw on any savings.

How much each person could benefit from making this move varies, but it could mean you have thousands of pounds more to live off each year, according to calculations by Fidelity.

Delay taking your state pension

The government boosts your state pension if you delay taking it upon reaching state pension age, currently 66, but rising to 67 between 2026 and 2028.

You have to actively claim a state pension and don’t receive it automatically so deferring can be done simply by not acting.

Deferring your State Pension increases its value by around 5.8% for each year deferred. On a full pension of £230.25 per week, deferring for one year adds nearly £700 a year in extra income.

Just bear in mind, for all the time you’re deferring, you’re not receiving the state pension. However, deferring can be a useful technique if you reach state pension age and don’t want to stop working.