Pensions - Articles - Inflation could reduce purchasing power by 68% in retirement


 * A 90-year old today who retired in 1981, aged 60, will have seen the purchasing power of a £10,000-a-year level pension income fall to just £3,207 in the past 30 years[1]
 * Standard Life research[2] shows that 57% of people would find a retirement income that keeps pace with inflation ‘attractive'
 * And yet only 3% of people purchased an inflation linked annuity in 2010[3]
 * Pensioner inflation rates higher than the overall UK inflation rate[4]

 Standard Life, the savings and investment specialist, has warned that the effects of inflation can seriously damage your retirement wealth. New data released today shows that a 90-year old who retired in 1981, when petrol cost 35p a litre5, would have seen the purchasing power of a £10,000-a-year level pension income fall to just £3,207 today.

 John Lawson, Head of Pensions Policy at Standard Life said: "Inflation can have a huge impact on the purchasing power of your retirement income. As people are living longer, retirement income needs to go that much further, with a 60-year old man retiring today living on average for another 26 years.

 "Our research shows that 57% of people do recognise that an income keeping pace with inflation is attractive. But currently, and somewhat inevitably, the majority go for the higher starting income of a level annuity, leaving only 3% choosing an inflation linked annuity. This is perhaps understandable given that annuity rates have reached record lows and level annuities start at a higher rate than their inflation linked alternatives.

 "People approaching retirement need to consider their own personal inflation rate may be higher in the future than that of the average person in the UK due to the types of products and services they will consume. After 10 years in retirement, a 60-year-old man who had purchased a RPI linked annuity with a fund of £100,000 could achieve a higher annual income than someone who had purchased a level annuity."

 Lawson concluded: "Low inflation has persisted for the last 15 years or so, but there is no guarantee that it will continue. Rising world demand for food and fuel, without a similar increase in supply, has seen prices for the basics rocket. People retiring today need to consider that they will still need to pay for food, fuel and other essentials for a long time into the future and that these basic items are likely to cost a lot more in 10 year's time than they do today.

 "There are many options to consider at retirement which could minimise the impact of inflation on your income, so seeking financial advice is vital."

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