Inflation is something that has been talked about a lot recently, but what does it actually mean? Inflation is important when looking at savings and retirement funds because it gives a good indication of how much money one really does need to have in the bank before you can retire safely – £10 now will not have the same worth as £10 in 20 years time. Inflation really is just an indicator of purchasing power.

The table above shows how inflation works – starting with a base figure in the left hand side column, the right hand columns show how much you would have to have in a given number of years time and a particular inflation rate to have the same purchasing power as you do now. As you can see, even with a small change in the rate of inflation, huge differences can occur.

Therefore, when planning your retirement funds, make sure that you include inflation rates in your calculations to ensure you will end up with the money you expect to and to ensure that you have the purchasing power that you hope for.

Inflation rates are also important for anyone with savings – if your savings account pays out less than the rate of inflation, you are effectively losing money because your purchasing power is decreasing. Your savings account interest rate (after tax) should always be higher than the rate of inflation to ensure that you are actually making money on your savings in real terms, rather than just on paper.

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