Standard Life Reveals Inflation Can Reduce A Retiree's Purchasing Power By 68%
Released on: October 28, 2011, 4:35 pm
Standard Life, the savings and investment specialist, has
warned that the effects of inflation can seriously damage one's
retirement wealth. New data released today shows that a 90-year-old
who retired in 1981, when petrol cost 35p a litre, would have seen the
purchasing power of a £10,000-a-year level pension income fall to just £3,207 today.
John Lawson, Head of Pensions Policy at Standard Life said: "Inflation can have a
huge impact on the purchasing power of your retirement income. As people are living longer, retirement income needs to go that much
further, with a 60-year-old man retiring today living on average for another 26
"Our research shows that 57% of people do recognise that an income keeping pace
with inflation is attractive. But currently, and somewhat inevitably, the majority
go for the higher starting income of a level annuity,
leaving only 3% choosing an inflation linked annuity. This is perhaps
understandable given that annuity rates have reached record lows and level annuities
start at a higher rate than their inflation linked alternatives.
"People approaching retirement need to consider their own personal inflation rate
may be higher in the future than that of the average person in the UK due to the
types of products and services they will consume. After 10 years in retirement, a
60-year-old man who had purchased a RPI linked annuity with a fund of £100,000 could
achieve a higher annual income than someone who had purchased a level annuity."
An example provided by the data shows the purchasing power in today's money of a £100,000 pension fund being used by a 60-year-old man retiring in October 2011 to
purchase a level or RPI-linked annuity. Various rates of inflation are shown over a
30-year period. If inflation averaged 7% over a ten-year period, the then 70-year
old man would begin to receive a higher annual retirement income than if he had purchased a
Please note in this example the level annuity receives a higher starting income than
the RPI-linked version. At year 10, with inflation at 7%, there is a crossover when
the RPI-linked annuity annual income exceeds the level annuity annual income. At
year 22, the total payments from the RPI-linked annuity exceed the total payments
from the level annuity.
Lawson concluded: "Low inflation has persisted for the last 15 years or so, but
there is no guarantee that it will continue. Rising world demand for food and fuel,
without a similar increase in supply, has seen prices for the basics rocket. People
retiring today need to consider that they will still need to pay for food, fuel and
other essentials for a long time into the future and that these basic items are
likely to cost a lot more in 10 year’s time than they do today.
"There are many options to consider at retirement which could minimise the impact
of inflation on your income, so seeking financial advice is vital."
About Standard Life:
Standard Life is a leading long term savings and investments company headquartered in
Edinburgh and operating internationally. Established in 1825, Standard Life provides
life assurance, annuities, life insurance, savings products, investment bonds, tax
efficiencies, pension products such as a self-invested personal pension, financial
education and investment management to around 6 million customers worldwide.
Standard Life is headquartered in Edinburgh and
employs around 9,000 people across the UK, Canada, Ireland, Germany, Austria, India,
USA, Hong Kong and mainland China. At the end of June 2011 the Group had total
assets under administration of £200bn.
19a Canning Street
0131 245 2737
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