The effects of inflation

A report published this week from the Prudential has warned that UK retirees could lose up to 60% of their spending power over the course of a 20 year retirement.

It is estimated that the average UK retiree enjoys an annual income of around £16,600. However were inflation to remain at its current level, this amount would effectively be worth just £6,700 in 20 years’ time. If an individual wants to sustain the lifestyle to which they are now accustomed in 20 years’ time, their retirement income would have to increase to around £40,000. With most pensioners on fixed incomes, this in the vast majority of cases, is extremely unlikely.

Moreover not only does high inflation impact hardest on those on low and fixed incomes, retirees are often hit disproportionally harder by so called ‘grey/silver’ inflation. This is because people in the over 65 age group tend to spend more of their income on essentials such as food and fuel, both of which have risen sharply in the past three years. This point was made in Aviva’s Real Retirement Report which highlighted that although average incomes for the over 55’s had risen marginally, these have been eroded by high levels of inflation. The charity Age UK recently found that ‘grey’ inflation has stood at 4.6% per annum since January 2008, whilst conventional RPI inflation was much lower at 3.1%.

David Love, Technical Consultant at Chamberlain said:

“This research backs up points we raised in a recent edition of Nurture, our newsletter. We made similar observations about the debilitating effect of inflation that surprised a number of our readers, including financial professionals. Although many of our clients are likely to be in the relatively fortunate position that they have amassed sufficient funds to afford them the option of Drawdown income rather than be forced to lock into a very low annuity rate, the need for effective wealth management becomes paramount, particularly in such a volatile climate. The impulse to commit all funds to deposit-based investments in the mistaken belief that this is the safe option can often be a strategy that backfires much earlier than many might expect.”

9th September 2011