Inflation could kill your pension pot

British pensioners are being doubly hit hard. Firstly from inflation, which means fixed incomes loses value when prices rise (and rise). They're also being hammered by historically low interest rates. So their savings don't have the chance to catch up with the cost of living. So why, given these pressures, aren't more pensioners buying inflation-linked annuities?

Pension potential

It's a fair question, especially given that most people are living many years longer than a few generations ago. Take, for example, a 90-year old who retired in 1981, aged 60. They 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, estimates Standard Life.

Yet John Lawson, head of pensions policy at Standard Life, says many pensioners continue to opt for an annuity with a larger starting income - but which does not climb with time.

"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."

The silent killer

"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."

So, think carefully. We may have low-ish inflation for the last decade or so. But not any more, witness the huge rise in food and fuel prices. These are basics. We all consume them, but particularly pensioners, who spend more on these basic proportionally than those in working (and able, with luck, to negotiate pay rises).

There is a sizeable downside (apart from lower income) to inflation-linked annuities though. Little competition for them. So providers are hardly falling over themselves to offer you a particularly competitive deal. So go very carefully, especially if you're health isn't great.

If you're at the cusp of deciding what annuity to take, let us know - and what you decide to choose.
Read Full Story