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Nearly £10,000 lost in real terms on a fixed annual retirement income over 20 years
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To beat inflation pensioners need retirement income to more than double over 20 year retirement
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Silver RPI, caused by rising food and fuel costs, eroding pensioners' spending power
Pensioners retiring this year on a fixed income could lose 60 per cent of their spending power over the course of a 20 year retirement, according to new analysis by Prudential.
Prudential's figures show that the average person retiring in 2011 expects an annual income of £16,600, but if that income remains fixed it will be worth a mere £6,700 in today's money in 20 years' time - effectively a £10,000 pay cut. In fact, assuming that inflation remains at its current level, pensioners will need their retirement income to more than double (to over £40,000), if they expect to maintain their standard of living for the next 20 years.
Pensioner inflation or Silver RPI is higher because retired people spend a greater proportion of their income on goods and services that are subject to the highest rates of inflation - such as food and fuel.
Vince Smith Hughes, Head of Business Development at Prudential, said: "Pensioners on a fixed income are particularly vulnerable when it comes to rising living costs and our figures demonstrate the true extent to which Silver RPI impacts on the spending power of those in retirement.
"There are alternatives to a fixed income in retirement, for example choosing a flexible income plan that has the potential to grow could help many retirees to mitigate the effects of increasing living costs. We recommend that people approaching retirement seek professional financial advice to help them understand all the retirement income options open them."
Research by Age UK recently found that Silver RPI has averaged 4.6 per cent a year since January 2008 - nearly 50 per cent more than the 3.1 per cent average annual inflation recorded by the Retail Prices Index (RPI) over the same period.
The purchasing power of a retirees' future income has been calculated using the standard ‘present value' statistical model based on an assumed future rate of inflation (in this case Age UK's Silver RPI).
Assumptions:
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An individual retiring aged 66 in 2011 expects on average to have an annual retirement income of £16,600*
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The rate of inflation experienced by individual's retiring this year will fluctuate through a 20 year retirement according to Age UK's calculations**
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