Inflation could halve income in retirement

Inflation remains a key issue for people considering retiring

Conventional annuities pay a higher starting income than inflation-linked annuities but over time inflation can erode 50% of your purchasing power.

Inflation could halve income in retirement

Inflation could halve income in retirement

MGM Advantage analysed various retirement income options to see which could potentially offer the best way to counter the effects of inflation eroding your retirement income.

By modelling four options; conventional annuity, inflation-linked annuity, an annuity increasing at 3% a year and an investment-linked annuity, the company has worked out the total income from each over a typical 22-year retirement.

Inflation-linked or escalation options, although protecting your purchasing power from the ravages of inflation, offer a much lower starting income than conventional annuities.

The total income over time is also less than conventional annuities, typically between 5% and 24%.

Investment-linked annuities by contrast can potentially offer the best of both worlds, with a flexible income which can initially match or exceed a conventional annuity, and the ability to help protect your income from inflation through the returns from equities.

Inflation remains a key issue for people considering retiring, who find themselves caught between a rock and a hard place with low annuity rates and inflation running above target. Nothing disintegrates under the glare of inflation like a fixed income,” said Andrew Tully, pensions technical director at MGM Advantage.

£100,000 pension potStarting IncomeAnnual income in year 22Total income over 22 years
Conventional annuity£5,743£5,743£126,346
RPI-linked annuity£3,331£6,197£101,718
Escalating annuity @ 3%£3,929£7,309£119,979
Investment-linked annuity£5,740£7,895£145,655

Inflation is forecast to remain above 2% and possibly above 3% in the short term.
Tully said: “People retiring today who need to generate an income should be considering all of their available options. For example, you could secure a base income using a conventional annuity and then invest the balance of your pension in an investment-linked annuity, which provides a hedge against inflation.”

Tully said being comfortable with the level of risk this presents is critical and suggests seeking independent financial advice.

“At the end of the day, your retirement annuity choice is a once in a lifetime opportunity. But as people live longer, it’s clear one of the greatest risks for retirees is simply ignoring inflation altogether,” he added.

Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
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