UK’s baby boomers fail to protect retirement incomes against inflation

Despite widespread concern about inflation, three in five consumers are not taking action to counter its effects when planning for retirement.

With the threat of higher inflation creeping back into the economy, nine in 10 UK Baby Boomers say they are worried about the effect of inflation on their future retirement income, according to research from Hartford Life Limited, a subsidiary of The Hartford Financial Services Group, Inc.

Yet despite this concern, three in five survey respondents say they have no plans in place to counter the effects of inflation on their future retirement income. The research was conducted by YouGov, an independent research agency.

“Inflation is clearly a concern for UK consumers, but the lack of action is worrying, especially when we consider that recent studies show us that inflation is affecting retirees more than any other group,” said Michael Kalen, CEO for Hartford Life Limited. Research by Capital Economics shows that the cost of living for some pensioners rose by 7.7% in the 12 months ending in April 2007 compared to a Retail Price Index (RPI) of 4.5%

“Boomers need to address this and start planning to protect their retirement incomes from the corrosive effect of inflation,” Kalen said. “They need to increase their retirement assets and the income they derive from those assets throughout retirement.”

Investing in equity markets is a proven way over the long term to keep pace, and even surpass, the effects of inflation. But for many investors, exposing their retirement savings to the ups and downs of the financial markets is an unacceptable risk. A study conducted by Hartford Life Limited last year found that nearly one in two UK investors were unwilling to accept risk in return for greater financial gain.

However, the latest research sponsored by Hartford Life Limited uncovered an appetite for guarantees to protect against market declines. Half of all survey respondents said that they would be willing to pay for a guarantee to lock in a minimum level of retirement income, with the potential to increase annually, should their investments grow. Only 20 percent of those surveyed expressed a willingness to pay for a similar guarantee to protect the value of their homes against potential reductions in property prices.

“People want their pension income to stay ahead of inflation but it’s also clear that they recognise the risks associated with equity investments,” Kalen said. “The introduction of guaranteed drawdown pensions provides a solution to this consumer demand in the UK. These products offer the income certainty of annuities but with the potential for growth of a drawdown scheme. Therefore, guaranteed drawdown pensions allow people to remain invested in equities and thus benefit from their potential upside, while at the same time providing a guarantee that protects the value of their pension in bear markets.”