A new study has warned that inflation will cut the spending power of pensioners by 60% over the course of a 20 year retirement.
Research done by the Prudential has shown that someone retiring in 2011 with an average income of £16,600 can expect to see the buying power of that income fall dramatically to £6,700 in 20 years time, effectively giving a pay cut of £10,000.
Pensioners are affected more than younger generations by inflation as they tend to spend more of their income on goods and services, for example fuel and food, which rise in price faster than items bought buy younger generations.
Although recent changes to the state pension will help maintain its buying power the trend of buying level Annuities compounds the problem.
An Annuity is the most option for creating an income from a pension. The majority of Annuities are bought on a level basis as the cost of adding in indexation options can be large. Using a pension Annuity calculator shows that to link an Annuity to RPI reduces the starting level of income by around 50%; this is unacceptable to most people who therefore opt for a level Annuity, preferring to deal with the pain of inflation rather than a lower starting income.
Pensioners who rely on interest from their savings to supplement their income have also been badly hit over the past few years.
Not only has inflation risen, which affects pensioners more than other generations, but interest rates have been held at all time lows meaning that the return on savings is no longer keeping up with inflation, thereby reducing the buying power of not only the capital but also the income produced.
Whilst there are some options for linking interest to inflation, for example the National Savings & Investments Index Linked Certificates, these are few and far between and it is almost impossible now for a tax payer to find an account where the net interest payment maintains the buying power of the capital saved.