Pensioners warned to inflation proof their income

Standard Life is warning anyone thinking about retirement to consider the effects of inflation eroding their income, as new data shows many people will see their retirement income swallowed up by the basic costs of living.

Using Office for National Statistics data and official Government inflation figures, Standard Life has calculated someone with a pension pot of £80,000, buying a level annuity, will spend their entire monthly income (from private and state pensions) on basic living costs like food and fuel within 20 years of retirement.

Standard Life has only looked at what it classes as essential expenditure. If you factor in non-essential spend, then the combined affect of the rising costs of living coupled with a level income will be felt much sooner in retirement.

Andrew Tully, Senior Pensions Policy Manager, Standard Life said: "The cost of living is rising fast for most people in the UK, but this is particularly acute for pensioners. Their spending habits are driven by commodities such as food and fuel bills and these inflation rates are much higher than the overall UK inflation rate.

"Pensioners relying on a fixed income will be feeling the pinch, with no sign of an immediate end to their misery. If pensioner inflation remains at around 6% per year, people with a fixed income could lose as much as half of their spending power over as little as ten years."

Tully continued: "People approaching retirement need to make some stark decisions. Do you choose one of the options to inflation proof your retirement income, for example an index-linked annuity? This provides a way of keeping pace with inflation but will provide a lower starting income than a level annuity.

"Or you could go with the higher initial income from a level annuity in the hope that prices and inflation stabilise over time. However, new solutions are being launched which will help address these issues by investing in the stock market and also guaranteeing an income which pays the bills."