Pensioners face drop in spending power

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PENSIONERS retiring this year on a fixed income could lose 60% of their spending power over the next 20 years.

That means an average annual income of £16,600 will be worth a pathetic £6,700 in today’s money – effectively a £10,000 pay cut over the course of a 20-year retirement.

Figures from Prudential show pensioner inflation, or the Silver RPI as Age UK have dubbed it, is higher than the rate for the rest of us because retired people spend a much greater proportion of their income on goods and services that are subject to the highest rates of inflation.

Assuming inflation remains at its current level, retirement incomes will need to more than double in the next 20 years just to allow people to maintain their current standard of living.

This comes on the back of research from Age UK showing that the over 55s have faced an additional £984.28 per year in living costs since 2008.

This has been caused by Silver RPI averaging 4.6%, almost 50% more than the 3.1% average annual inflation recorded by the Retail Prices Index over the same period.

The figures are frightening when you consider how much today’s pensioners are struggling to make ends meet as escalating food and energy prices show no sign of easing – and things are set to get tougher.

That’s why it’s crucial that anyone approaching retirement, especially those who have saved their hard earned cash into a private pension, makes sure they get the best deal when cashing in savings and turning them into an income.

You only get one chance to get this right – get it wrong and you are stuck with your decision for the rest of your life.

Vince Smith Hughes from Prudential says: “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 pensioners.”

There are alternatives to choosing a fixed income in retirement, such as options that increase each year in line with inflation to help boost spending power.

And millions of pensioners lose out on vital cash because they simply stick with the lifetime income offered by the pension firm they have saved up with, rather than comparing deals.

And millions more lose out again because they are unaware of what are known as enhanced annuities.

These offer higher rates to those who smoke or have health ­conditions that affect life expectancy.

Joanne Segars, chief executive of the National Association of Pension Funds, says: “This report shows the importance of inflation and the crucial need to shop around for the right annuity.

“While getting an ­inflation-proofed annuity will be more expensive than a ‘no frills’ approach, it is a decision that demands serious consideration.”

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