Fixed retirement income & inflation

Pensioners on a fixed income could lose 60% of their spending power during a 20 year retirement, according to new research from Prudential.

The average person retiring in 2011 expects to receive an income of £16,000 a year.

Assuming this income remains fixed, it will be worth £6,700 in today’s money in 2031, which is effectively a £10,000 a year pay cut.

If price inflation stays at its current level, pensioners will need their income to more than double to over £40,000 in order to maintain their living standards during retirement.

People in retirement tend to suffer a higher level of price inflation, due to the nature of goods and services they consume. These typically rise in price at a faster pace than the goods and services consumed by younger people.

Choosing a retirement income option which enables you to keep pace with price inflation is an important consideration.

Whilst inflation-linked annuities are more expensive than the level option, if you live for longer than expected they prevent you from having to regularly cut back on your spending because of price inflation.

It is important to consider the various retirement income options, as well as shopping around to get the most competitive annuity rate when you retire.

Photo credit: Flickr/Simon Blackley