Where inflation stands now
Inflation has come down from its 2022 peak but remains above the Bank of England’s 2 percent target. The Office for National Statistics (ONS) reports that CPI inflation was 3.8 percent in the year to September 2025, while CPIH, which includes owner-occupiers’ housing costs, was 4.1 percent. These rates were unchanged from August, underscoring a plateau rather than a straight line back to target.
What the policy rate means for savers
On 6 November 2025, the Bank of England’s Monetary Policy Committee maintained the Bank Rate at 4 percent. That stance reflects progress from the double-digit inflation shock, yet the Committee still faces above-target inflation and pay growth cooling only gradually. For savers, a 4 percent policy rate tilts cash and short gilt yields higher than in the 2010s, but it does not guarantee a comfortable real return once inflation is taken into account.
How wages are moving
Average weekly earnings remain elevated in nominal terms. The ONS estimates total pay at £733 per week in September 2025 and highlights that nominal growth has been strong over the medium term. When wage growth outpaces price inflation, households can rebuild purchasing power, but if pay growth decelerates while inflation proves sticky, real disposable income gains can fade.
Longevity and planning horizons
Planning windows must reflect longevity, not just market returns. ONS national life tables for 2021-2023 put period life expectancy at birth at 78.8 years for males and 82.8 years for females. At age 65, the remaining life expectancy is 18.5 years for men and 21.0 years for women. Healthy life expectancy at birth in England is lower—61.5 years for men over 2021-2023—which reminds planners to factor healthcare and long-term-care risks into drawdown assumptions.
Why “real” beats “nominal”
Nominal growth targets treat a pound today as equal to a pound in 2035. Real targets account for purchasing power. Over long horizons, a small gap between nominal returns and inflation compounds into a large difference in living standards. With CPI near 3.8 percent and cash rates influenced by a 4 percent Bank Rate, the real return on low-risk assets can be close to zero before fees and taxes. Savers therefore need a disciplined framework to set growth targets, compare funds, and test drawdown plans under different inflation paths.
Forecasts are not guarantees, but they anchor scenarios
The Office for Budget Responsibility (OBR) expects a temporary inflation bump through 2025, with inflation averaging around 3.2 percent in its March 2025 forecast before gradually returning toward 2 percent. That means the central scenario has inflation easing, but it also acknowledges near-term volatility. Use this as a base case, then test adverse cases where prices stay higher for longer.
A four-part framework for growth targets
1. Measure past performance the right way
Annual averages can mislead when returns are uneven. The compound annual growth rate (CAGR) standardizes multi-year performance to a single annualized rate. When comparing two funds or asset classes over the same period, CAGR levels the playing field by capturing compounding effects rather than simple arithmetic averages. Investors can easily check their portfolio’s long-term growth pace using a CAGR calculator, avoiding the need for detailed manual computations.
2. Project future balances conservatively
Future value calculations turn contribution plans into end-balance estimates under assumed annual returns. If CPI averages 2.5 to 3 percent across the decade and a diversified portfolio nets 5 to 6 percent nominal before fees, the real return may be roughly 2 to 3 percent. Small differences compound over 20 to 30 years, so it’s prudent to test bands rather than a single point estimate. Savers can approximate this with a future value calculator to see how changing return or inflation assumptions shifts outcomes.
3. Evaluate cash-flow-heavy investments using internal rates of return
Workplace pensions, buy-to-let properties, or private-market exposures involve irregular cash flows. The internal rate of return (IRR) shows the discount rate that brings those flows to break-even in present-value terms. IRR is especially useful when contributions and withdrawals vary or when a project has interim proceeds before final sale. A single IRR number isn’t the whole story, but it provides a common yardstick across very different cash-flow profiles. When assessing such investments, tools like an IRR calculator can clarify how timing and scale of flows affect profitability.
4. Stress-test with inflation and longevity
After setting a base case, raise inflation by one percentage point and extend the retirement horizon by five years. Re-run the projections. If the plan still funds essential spending with a margin, it is robust. If not, adjust contributions, asset mix, or spending assumptions.
What higher rates imply for assets across the risk spectrum
Cash and short gilts
With Bank Rate at 4 percent, cash and very short-dated government securities offer higher nominal yields than in the years after the global financial crisis. That can anchor near-term liabilities or emergency funds, but there’s reinvestment risk if policy rates fall. The UK Debt Management Office’s daily gilt yield data help savers gauge real returns after inflation.
Intermediate gilts and duration risk
Longer-dated gilts are more sensitive to interest-rate shifts. If inflation descends toward target and the Bank gradually eases, capital gains on longer-duration bonds are possible. If inflation proves stickier, yields could stay higher, weighing on prices. Because long-dated bonds anchor annuity rates and liability-driven strategies, their real-yield trajectory will shape retirement incomes.
Equities and diversified growth
Over long periods, equities have historically delivered a real return premium over bonds, but dispersion is wide and timing matters. Applying CAGR to rolling ten-year windows is a better habit than focusing on single calendar years. In today’s mix of moderate inflation and gradual policy easing, equity return expectations should always be framed net of fees and inflation, not just nominally.
Property and private assets
Rental yields, financing costs, and maintenance expenses all move with inflation and rates. IRR is the right tool for property or private investments with upfront outlays, intermittent income, and uncertain exit prices. Stress-testing IRR under higher operating costs and slower price growth helps avoid the optimistic bias common in base-case projections.
Translating macro into a saver’s plan
- Define the real target.
If the goal is to maintain a given standard of living, make the target a real one. For example, aim to grow purchasing power by 2 percent per year after inflation, not simply to earn 6 percent nominal. - Match buckets to horizons.
Keep near-term spending in low-volatility instruments. For funds needed within five to ten years, blend bonds and equities to diversify inflation and reinvestment risks. For 15 years and beyond, treat equities and other growth assets as engines for purchasing-power growth while recognizing sequence risk. - Use workplace pension architecture.
The Department for Work and Pensions reports strong participation through automatic enrolment. Contribute at least enough to capture any employer match, then consider voluntary increases if feasible. Compare contribution rates against the DWP’s adequacy analyses to avoid relying solely on optimistic returns. - Tie longevity to withdrawal rates.
With remaining life expectancy at age 65 close to two decades for men and just over two decades for women, fixed drawdowns of 4–5 percent may be too aggressive if returns disappoint or inflation runs hot. Build a glidepath that adapts to markets and health, noting that late-life costs often arrive in uneven spikes.
Policy changes to monitor
State Pension age:
The UK government launched its third State Pension Age Review in July 2025 to assess whether the current timetable remains appropriate. Any revision could alter expected retirement ages for some cohorts, directly affecting contribution needs.
Independent forecasts and fiscal signals:
HM Treasury’s monthly survey of independent forecasts and the OBR’s Economic and Fiscal Outlook both update the baseline for inflation, wages, and yields. These official resources are valuable for calibrating central and downside cases in portfolio planning.
Putting it all together for the next decade
Start from the numbers. Price growth is running near 4 percent. Bank Rate sits at 4 percent. Wages remain strong but may cool as the economy slows. Life expectancy implies a retirement horizon of about 20 years for many now in their 60s. From these facts, several priorities emerge.
- Make growth targets real rather than nominal. Measure past performance with an annualized lens, not a simple average.
- Use disciplined projections to estimate the future value of contributions and see how small shifts in return or inflation compound over decades.
- Evaluate uneven cash flows with IRR and retest assumptions under higher inflation or longer lifespans.
- Stay responsive and revisit plans whenever the Bank of England shifts policy, ONS inflation data surprise, or pension-age timelines change.
Real returns are earned one decision at a time. The decade ahead may deliver lower inflation than the 2022 shock, but not a straight path. Savers who translate official data into realistic, stress-tested plans will be better placed to protect purchasing power and sustain retirement incomes through changing cycles.
