24th June 2013
Hundreds of thousands of UK retirees could see more than £6bn wiped off their spending power as a result of the corrosive impact of inflation.
According to the retirement income specialist MGM Advantage, some 360,000 people retiring each year could find their combined spending power fall by £6.3 billion over a 25-year retirement due to the effects of inflation.
Just last week, official data showed that UK inflation had jumped from 2.4% in April to 2.7% in May and further rises are anticipated before any potential tapering.
If inflation averaged 3% over a 25-year retirement, the real value of income reduces by 53%, collectively wiping billions off retirees purchasing power over that period. MGM Advantage considers this a conservative figure and has based this on people retiring this year with an average pension pot of £33,000, choosing a level annuity with no escalation or index-linking.
Andrew Tully, MGM Advantage, says: “These figures show just how damaging inflation can be, wreaking havoc with people’s pensions and wiping thousands of pounds off their income over time. People close to retirement have some very tricky decisions to make when looking to convert savings into retirement income.
“With record low annuity rates the obvious solution could be to shop around for the best starting income you can find. However, there are other ideas to consider which could help protect your retirement income from inflation.”
At retirement, savers usually cash in their pension to purchase an annuity, which then provides a guaranteed income for life but annuities can come in different shapes and sizes, which is why experts always recommend shopping around for the best deal.
To tackle the impact of inflation savers could opt for an escalating annuity, which rise in line with inflation but retirees will often find the starting income is significantly lower than other options. For savers with a pre-existing health or lifestyle condition, they should look at enhanced annuity options which can add up to 40% to their income. There is also the option of investment-linked annuities, which invest in equities and other asset classes providing a hedge against inflation, although this comes with a level of risk.
MGM Advantage has published a guide to the effects of inflation in retirement in association with Jupiter which can be downloaded here: http://www.mgmadviser.com/products/flexible-income-annuity/growth-performance