Inflation and Pension Annuities
The effects of inflation can in some circumstances have a profound effect on the income level from a pension annuity. For those who choose a fixed rate annuity, the annual income will be fixed for the rest of their life. This is a popular option as annuitants know exactly how much money they will receive until they die and so can plan accordingly. However, if there are sharp increases inflation over several years, the increased price of living may mean that many who have purchased a conventional annuity may have wished they had opted instead for an inflation-linked annuity.
Laith Khalaf, a pension expert who works for Hargreaves Lansdown argues that even small increases inflation can cause an impact on requirement income…. “irrespective of whether this is a spike or not, with a pension, inflation is always going to cause damage over the long term so you need to make sure you are prepared for that.”
Take for example an annual retirement income of £10,000. It would be worth just £5,538 after two decades of 3% inflation. It is also worth noting that “real” inflation can feel much higher than the official figures released by the government. Some have argued that those approaching pensionable age often “feel” the highest level of inflation of any age group. ”The goods and services that older people usually buy often increase in cost much faster than the typical basket of goods for younger people” argues Martin Bamford from the IFA. Inflation linked annuities can protect against this, although they are more expensive to buy and the starting income is lower than with a level annuity.
