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Pensioners warned to inflation proof their income

23 June 2008

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Standard Life is warning anyone thinking about retirement to consider the effects of inflation eroding their income, as new data shows many people will see their retirement income swallowed up by the basic costs of living.

Using Office for National Statistics data and official Government inflation figures, Standard Life has calculated someone with a pension pot of £80,000, buying a level annuity, will spend their entire monthly income (from private and state pensions) on basic living costs like food and fuel within 20 years of retirement ¹.

Standard Life has only looked at what it classes as essential expenditure. If you factor in non-essential spend, then the combined affect of the rising costs of living coupled with a level income will be felt much sooner in retirement.

Andrew Tully, Senior Pensions Policy Manager, Standard Life said: “The cost of living is rising fast for most people in the UK, but this is particularly acute for pensioners. Their spending habits are driven by commodities such as food and fuel bills and these inflation rates are much higher than the overall UK inflation rate ².

"Pensioners relying on a fixed income will be feeling the pinch, with no sign of an immediate end to their misery. If pensioner inflation remains at around 6% per year, people with a fixed income could lose as much as half of their spending power over as little as ten years."

Tully continued: "People approaching retirement need to make some stark decisions. Do you choose one of the options to inflation proof your retirement income, for example an index-linked annuity? This provides a way of keeping pace with inflation but will provide a lower starting income than a level annuity ³.

"Or you could go with the higher initial income from a level annuity in the hope that prices and inflation stabilise over time. However, new solutions are being launched which will help address these issues by investing in the stock market and also guaranteeing an income which pays the bills.

So how do the figures add up?

For further information, please contact:

Paul Keeble
Direct 020 7872 4481 / Mobile 0771 248 6387

Notes to editors

1. Couple, male aged 65 and female aged 62, with a £80,000 pension fund who have purchased an annuity (all assumptions in brackets):
   
   

   	2008	2018	2028
   State Pension (basic state pension and second state pension; increasing at 3.5% until 2012, 5% thereafter)	£147.32	£213.20	£339.79
   Private Pension (level annuity, 50% joint life, 5-year guarantee)	£97.38	£97.38	£97.38
   Total Income	£244.70	£310.58	£437.17
   Food and drink (increasing at 6% per year*)	£50.10	£84.64	£151.58
   Housing, fuel and power (increasing at 5.5% per year*)	£38.10	£61.69	£105.37
   Household goods and services (increasing at 0.7% per year*)	£26.20	£27.90	£29.91
   Transport (increasing at 6.6% per year*)	£47.50	£84.43	£159.99
   Total weekly expenditure	£161.90	£258.66	£446.85
   Expenditure as a % of Total Income	66%	83%	102%

   
   *Source: Office for National Statistics April 2008
   
   
2. Recent letter from the Bank of England to the Chancellor (16th June) said UK retail food prices have risen by 8% in the year to May 2008 and UK household electricity and gas bills by around 10%. The official CPI inflation rate for May 2008 was 3.3%.
   
   
3. Level annuity vs. inflation linked annuity: assuming a purchase price of £50,000, a male aged 65 would currently receive an income of £3,662 per year via a level annuity while an index-linked annuity would provide the same man £2,222 per year starting income, although this would rise in line with the Retail Prices Index (RPI).
   
   
4. Tax and legislation are liable to change. This information is based on Standard Life’s current understanding of law and HM Revenue & Customs practice.

The information on this site is for qualified advisers only and must not be relied on by anyone else. If you are not an adviser you should go to our main website for information about our products and services.

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