-
A £10,000 annual income costs £85,000 more with inflation protection
-
Drawdown may offer a hedge against inflation but comes with investment risk
Today’s ONS figures highlight CPI inflation increasing from 0.3% in May to 0.5%. While today’s uptick can be largely attributed to rising air fares and oil princes the fallout from the Brexit vote means there is potential for further inflation in the months to come. The value of sterling recently hit a 31-year low against the dollar (6th July) and if the pound continues to remain weak, this will mean that cost of the nation’s imports and therefore the price of goods rise.
Commenting on the rise in inflation Kate Smith, Head of Pensions at Aegon said: “After more than a year of nearly zero growth in prices, it becomes easy to forget about the effects of inflation. While some inflation is healthy for the economy, it poses particular challenges for retirees on fixed incomes who gradually see the value of their spending power eroded.
“For those approaching retirement this creates a difficult decision of whether or not to pay for an inflation proofed income. It’s possible to buy an annuity which increases in value either in line with inflation or at a set rate each year. The challenge is that this protection is expensive to provide and as a result an annual income for life of £10,000 rising at 3% per year costs £270,000 to buy. This compares against just £190,000 for a flat income of £10,000.
“Since the introduction of the pension freedoms people have increasingly been opting for drawdown over annuities. Drawdown allows people to keep their savings invested in the market and take an income. This approach is often said to offer some protection against inflation as shares tend rise in line with inflation, but the downside is that retirees have to contend with investment volatility and may need to reduce their income if the value of their investments falls.
“These trade-offs between income certainty and investment volatility are all part of the new retirement landscape so it’s important that people take time to consider their options carefully and take financial advice if they need it. The plus side is that people have a great deal more choice than at any point in the past. Today’s rise in inflation means we are still well below the Bank of England’s 2% target, but this is a trend those approaching retirement will want to monitor.”
Income from different annuities at age 65 and 85:
|
