Your pension will be halved, as incomes fall £6.3bn

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%VIRTUAL-SkimlinksPromo%A new study has revealed that the 360,000 people retiring this year could see their income fall by a combined £6.3 billion during their retirement. The killer blow will come from inflation, which will gradually erode their income until it's worth roughly half what it was worth on the day they retired.

It could destroy the retirements of millions of people.


MGM Advantage highlights that 90% of British pensioners who buy annuities opt for a level annuity - which will keep paying out the same figure for the rest of their life. It means that inflation eats into this income during their retirement.

If inflation averaged 3% over a 25-year retirement, the real value of income reduces by 53%, collectively wiping £6.3 billion off retirees' purchasing power over that period. Andrew Tully, MGM Advantage, comments: "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."

This is particularly worrying, given that a separate study by M&G found that we have no faith in the Bank of England to control inflation. In the short and medium term we have very little hope that inflation is going to fall at all from the current level, and we expect inflation to be around 3% over the next five years. This effectively means that £100 today will have the purchasing power of £97.30p in one year.

Jim Leaviss, Head of Retail Fixed Interest at M&G isn't surprised by the results, given that "UK inflation has been persistently above the Bank of England's 2.0% target for more than three years."

Protect yourself

It's a grim picture, but Tully says there are some things you can do to help protect the spending power of your pension during your retirement.

The first step is to ensure you get the best possible income, by shopping around for an annuity. If you qualify for an enhanced annuity you could get an additional income of 40%.

You can inflation-proof your income by choosing an escalating annuity. However, this comes at a cost. Often you will find the starting income is significantly lower than other options, so you need to consider if it's realistic.

You could also consider alternatives such as investment-linked annuities, which invest in equities and other asset classes, which could help your income increase during retirement. However, this comes with a level of risk, which you need to fully understand before you touch a product like this.

Those with larger pension pots could consider income drawdown, although again, this only suits certain people and comes with a level of investment risk, so should never be considered without advice.

Finally, you could adopt a 'mix and match' approach, buying a conventional annuity with some of your pension pot, so you have an income, then using the rest to buy investment-linked annuity, which if it grows could increase your income over time. However, this again comes with a level of risk, and should only be considered with the help of a professional.

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Your pension will be halved, as incomes fall £6.3bn

If, like many Britons, you have failed to save the cash you need to maintain a comfortable standard of living in retirement, one option is to sell your home and downsize to a smaller property, using the money leftover to cover your living costs.
If moving out of the family home is too much of a wrench, however, the good news is that equity release schemes allow you to stay in your house or flat while still using the equity built up in it to provide some extra cash. The downside of the schemes, which work a bit like mortgages, is that you may not have much left to pass on to any children or other relatives.
But that's a small price to pay for a reasonable standard of living. For more information, try Age UK on 0800 169 6565.

Choosing the right annuity can have a significant impact on your retirement income. And as with most pensions, you automatically have what's called an 'open-market option' (OMO), you can scour the market for the highest annuity rate.
It is worth checking what your pension provider is offering first, though, as some companies offer guaranteed rates for existing customers that are likely to beat those available elsewhere. The Pensions Advisory Service on 0300 123 1047 is a good place to get some free advice.

On retirement, most people convert their pension fund into a guaranteed income annuity that pays out the same amount every month for the rest of their lives.
However, you can also choose an increasing annuity that pays out smaller amounts in the first few years but offers larger payments further down the line. This may prove a wise move if the rate of inflation remains at over 2%.

It is now easier to work later in life because the "default retirement age" has been scrapped.
People approaching retirement age and worrying about money can therefore choose to work for a few years longer - potentially transforming their financial situation. Other than the extra income from working, these people can look forward to higher state pensions, and higher annuity rates due to their greater age.
They can also benefit from bigger tax allowances and the fact that they no longer have to pay National Insurance contributions. Check out this nidirect website for more details.

You could get a much better rate with an impaired-life annuity if you have a medical condition that is likely to reduce your life expectancy.
Incredibly, even snoring, which is a common symptom of Sleep Apnoea could have an impact.
According to figures from MGM Advantage, a man with this condition could receive an extra £12,000 retirement income over the course of their retirement - or £571.44 extra money each year. Click here to find out more.

To maximise your retirement income, it is vital to ensure that you are receiving all the benefits to which you are entitled. These include the basic State Pension, and in some cases, the additional State Pension.
If you are on a low income, you could also qualify for the guaranteed element of Pension Credit, while those with some savings may get the savings element of this benefit. For more information about these and other benefits such as the Winter Fuel Payment, click here.

Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.
The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.


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