How Pensioners Can Beat Inflation With Their Savings
Published / Last Updated on 19/05/2022
With inflation at 9%pa and savings interest rates at no more than 1% or 2%pa currently, this means that if you have cash savings, you are literally losing money everyday as inflation devalues the value of your cash savings everyday. Even based upon current numbers, that’s a 7% devaluation (9% minus 2%) per year.
Use Pension Tax Relief to Beat Inflation
If you are not working, a child or a pensioner below aged 75, you are still allowed to pay into a pension scheme.
The maximum you can pay into a pension per year, if not earning, is £2,880pa net of tax relief, when 20% tax relief is added at source, your pension fund is now worth £3,600.
If you then cash some or all of this using flexible drawdown or even by something called an Uncrystallised Pension Fund Lump Sum (UFPLS), you take part as 25% tax free cash (in UK) and the balance is the taxable pension at 20% income tax if you are a basic rate tax payer.
- £2,880 paid in +20% tax relief = £3,600 pension fund.
- Cash in £3,600 pension fund. 25% is tax free = £900 tax free cash paid to you.
- Balance of pension fund £2,700 may be taxable at 20% = £2,700 X 20% tax = £540 income tax withheld. Net payment to you for taxable part = £2,160.
- Total payment after tax to you = £900 + £2,160 = £3,060.
Summary
You paid in £2,880 and got back £3,060 overnight. That’s a profit of £180.
That’s a 6.25% return overnight. Compared to leaving it in the bank and losing money to inflation erosion. If if you cashed in after a week, you make 6.25% and then put it back in the bank to earn 2%pa, that’s an 8.25%pa return. Inflation will soon hopefully be back below 8% pa meaning you are in profit and your cash has not devalued.
You may even get some investment growth if you leave the pension pot in place for a period and draw it out after you have made some growth in a year ot two.
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