A smart way to stop inflation eating your pension

If you’re regularly putting money into your pension, you may have asked yourself will that amount still be enough in the future?

We all know the price of goods and services goes up over time – yet many of us still contribute the same fixed amount to our pensions year after year. The reality is, £100 today simply won’t buy the same in 5, 10, or 20 years.

Unless your contributions grow with inflation, you could be saving less than you think. Indexation helps address this by automatically increasing your pension contributions in line with inflation, helping preserve the real value of what you’re saving and ensuring your future purchasing power keeps pace with rising costs.

Could inflation be eroding your future wealth?

Inflation has shown to reduce the buying power of your money over time. For example, at a 5% inflation rate, an item that costs £1,000 today would cost £1,050 in just one year. Over 20 years, this impact can compound dramatically.

Over a 20-year period, the value of your money in the UK is likely to be significantly less due to the effects of inflation. While we can’t predict future inflation rates with absolute certainty, historical trends suggest a cumulative inflation rate of around 50–60% over two decades, according to the Office for National Statistics (ONS). This means that £1,000 in 2025 could have the purchasing power of roughly £546.78 by 2045.

The UK’s Retail Price Index (RPI), which tracks changes in the prices of goods and services over time by typical households, has fluctuated over the years. While it doesn’t directly measure inflation, it provides a useful indication of how the cost of living changes. Although exact projections are difficult, past data gives us a useful benchmark to understand how inflation erodes value over time.

Now consider this based on the above analysis, if you’re contributing into your pension and leave that amount unchanged, the real value of that contribution could be worth nearly half in 15–20 years. In today’s terms, you’d essentially be saving far less than you think.

What is indexation and why does it matter?

Indexation can automatically increase your pension contributions each year, in line with RPI. It’s a simple adjustment that ensures you maintain the real value of your savings over time.

Let’s look at a practical example. Imagine three pension savers. 

• Saver A begins with a pension pot of £10,000 and makes no further contributions. This could result in an approximate value of £18,000 after 20 years assuming a 3% annual return.
• Saver B also starts with £10,000 and contributes £100 per month, with no adjustment for inflation. This could result in an approximate value of £50,000 after 20 years assuming a 3% annual return.
• Saver C starts with £10,000 and contributes £100 per month, with contributions increasing annually in line with inflation (index-linked). This could result in an approximate value of £60,000 after 20 years, assuming a 3% annual return and 3% indexation increase on contributions.

As the graph illustrates, those who contribute to their pension with the added benefit of indexation could enhance their savings further than those who don’t.

Workplace pensions or personal contributions?

If you’re in a workplace pension, your contributions often rise naturally as your salary increases. For example, if you receive a 5% annual pay rise, your contributions typically grow in proportion.

However, with personal pensions or SIPPs, contributions are usually fixed unless you adjust them. That’s why indexation is particularly important for private pension plans – it helps you keep pace to help avoid this risk.

We often see clients who set up personal pensions alongside their workplace schemes. This can be a smart move for some. Building a secondary pension pot can give you greater control and flexibility in retirement. However, it may also be worth considering additional contributions to your existing workplace scheme.

The most successful clients take it one step further they add indexation.

A small step with big long-term impact

Adding indexation to your pension contributions can protect your savings against inflation and helps to increase the probability of strengthening your future buying power.

It’s simple to set up and once it’s in place, it adjusts automatically each year. One decision now can potentially mean more in retirement.

Are you ready to future-proof your pension?

Whether you’re just starting a personal pension or already contributing regularly, ask yourself are your contributions keeping up with inflation? Will your savings still meet your retirement goals in the future?

If the answer is uncertain, it may be time to have a further discussion to plan.

Speak to a financial consultant today to review your contributions and put a long-term growth strategy in place.

Set up contributions today by logging into your secure online account.

Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.