Inflation rise spells disaster for pensioners

How inflation can destroy your retirement income

Filed photo dated 18/09/12 of money. Inflation fell for the sixth month in succession in March paving the way for an end to the prolonged squeeze on wages, official figures showed today. PRESS ASSOCIATION Photo. Issue date: Tuesday April 15, 2014. The Consumer Prices Index (CPI) rate dropped to a new four-year low of 1.6%, from 1.7% in February, according to the Office for National Statistics (ONS). See PA story ECONOMY Inflation. Photo credit should read: Dominic Lipinski/PA Wire

The latest inflation figures revealed that prices are rising faster than anyone had expected. The 1.2% rise in November was the highest since October 2014, and has led to speculation that it will rise even further in 2017 - as the impact of the weak pound filters though into shop prices. This is particularly bad news for pensioners.

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Pensioners tend to be hit harder by inflation than the majority of the population, because they spend a larger proportion of their income on the kinds of necessities that will be rising in price - including food and petrol.

As prices rise, this will put the squeeze on anyone on a fixed income, including everyone who bought a fixed annuity with their pension pot. Kate Smith, Head of Pensions at Aegon, adds: "Increasingly people are living 20 or more years in retirement and even low-level inflation can erode the value of retirement income over time."

For those in drawdown, meanwhile, Vince Smith-Hughes, retirement expert at Prudential, points out that they will have to think again about how much income they take from their pension funds - and balance the fact that the cost of living has risen against the need to leave enough cash invested within their pension to last for the rest of their life. He says: "Research shows that fewer than one in 10 pensioners will overspend in their first year of retirement, but ensuring their funds last the rest of their life becomes more difficult if prices rise significantly."

Retirees with significant savings outside their pension, meanwhile, have an incredibly difficult job in helping this cash hold its value. Richard Wazacz from the peer-to-peer lending platform, Octopus Choice, points out: "Conditions have been terrible for some time, but this bigger than expected rise in inflation could mark the beginning of an even more painful period for the UK's savers. With interest rates almost certain to stay at their current level given the uncertain economic and political climate both at home and overseas, rising inflation will make it harder than ever for savers to keep their money real. If the Bank of England's latest inflation and interest rate forecasts prove accurate, money deposited in the average high street savings account today will be worth less in real money after both one and two years."

The squeeze on savings may persuade people to move their money into an alternative vehicle. However, as Wazacz points out this comes with risks of its own. He explains: "Anyone considering different options to cash in an effort to keep their money real should seek independent financial advice and pay close attention to the risks that come with rising up the risk spectrum."

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