Just 3% of pensioners protect income from inflationAn inflation-linked annuity can offer better value
19 October 2011
Just 3% of pensioners buying an annuity last year chose one that will keep pace with inflation, according to new research from savings and investment provider Standard Life.
Traditional level annuities pay out more than inflation-linked annuities in the first few years. However, level annuities pay the same amount every year for life and do not increase with inflation - this means that the buying power of your pension income will steadily drop as you get older and prices rise.
For example, a 90-year old today who retired in 1981, aged 60, will have seen the purchasing power of a £10,000-a-year level pension income fall to just £3,207 in the past 30 years.
57% of those surveyed said they would find a retirement income that keeps pace with inflation ‘attractive’, but few put this aim into practice.
High pensioner inflation makes things worse
Many approaching retirement may be deterred from purchasing an inflation-linked annuity because you would receive far less than with a level annuity initially. To generate an annual income of £10,000 with a level annuity on today's rates, you might need a pension pot of around £167,000. To generate the same level of income with an inflation-linked annuity, you'd likely need £280,000.
However, 'pensioner inflation' is potentially much higher than the UK headline rate of 5.2%. With retirement incomes largely fixed, pensioners are particularly vulnerable to runaway energy and food prices.
That's why we're campaigning for a fairer deal on energy and want to put an end to hidden charges, confusing tariffs and misleading deals.
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Which? principal researcher, Martyn Saville, commented: 'Life expectancy in the UK is steadily increasing and a retirement of 30 years is now not unusual.
'You may be tempted to maximise your pension in the early years by choosing a level annuity, but it's vital to consider how you're going to pay for your later years too. An extra few pounds a month now could leave you in poverty if you live to 90, particularly if inflation continues to rise.'