Inflation in retirement

Inflation in Retirement

Imagine not having a pay rise for the rest of your life…

Statistics suggest you’ll live longer than your parents. The average man retiring at 65 is now expected to live another 22 years, whilst the average woman is likely to live two more years on top of that. That means your pension needs to stretch further. So, deciding whether to link it to inflation, the annual rise in the cost of goods and services, becomes more important.

Each year, the government have a target inflation figure of 2.5%. In 2001 Retail Price Index* (RPI) more than doubled the government’s target level of inflation, which was then at 5.4%, the highest published figure since 1991. The table below shows how much some everyday items have increased in price over the past 22 years.

Average Price Rises

On average the prices of everyday goods have increased by 6.85% each year for the last 22 years. Once you retire, your pension is your income. With that in mind, if someone offered you a job with a good monthly salary, but said there would be no pay rise for 22 years, would you take it?

everyday items

Index Linked Pensions

This is the kind of decision you have to consider when choosing whether to take an index linked pension. Your pension fund stays the same whatever but you must decide how you want it to be allocated – with a regular income throughout your retirement or by receiving smaller payments that grow each year in line with a recognised inflationary measure like RPI or a set percentage figure.

Index linked pension annuities are one way of combating inflation but can reduce your starting income by as much as 40%. Invested annuities can also be a good way of keeping inflation at bay without sacrificing your starting income. However, because they are based on investments your income can also go down.

everyday items

*Source The Office for National Statistics August 2012, Yahoo FTSE Historical Data 2012

Decisions, decisions…

If the goods you buy increase in line with the Retail Price Index, this means that, based on historical figures, £1,000 will be worth only half as much, i.e. £500 in 22 years time. In other words, you are likely only to be able to afford half as many goods as you can today : gas, electric, food, grandchildren, holidays, golf, pastimes/hobbies…

Furthermore, if we consider the average inflation of the goods listed above, it could in fact take much less than 22 years for there to be a serious effect on your pension. There is a possibility that it could take just 10 years before the amount of goods you can currently buy with your money halves.

Contact Us Now to find the best index linked pension option for you.

The Pension PlannerInflation in retirement