Posted on Oct 20, 2011 by Sergio Ulloa
New research published by savings, investment and insurance specialist Standard Life warns that a substantial increase in inflation could cut the average spending power of a pensioner in the United Kingdom by over 60 percent when as they enter retirement,
The UK Office for National Statistics (ONS) reported on Tuesday that inflation had spiked to 5.2 percent in September, a 20 year high, and well above an economists' consensus forecast of 4.9 percent. According to these statistics, the cost of living in Great Britain is rising faster now than in any other country in the European Union, barring Estonia. The ONS attributed the rise in inflation primarily to skyrocketing gas, electricity and fuel prices although food and transport costs were also considerably higher that last year as well. Overall, prices in the UK economy rose by 0.6 percent from August to September, with utility bills leading the way. The average UK gas bill went up by 13 percent while electricity rose 7.5 percent during the month. These price increases not only draw the immediate ire of households, politicians and consumer groups, but also affect UK savings and budgeting strategy going forward. By law, the government is forced to evaluate next year's state pension payments in conjunction with the previous September's inflation figures. With a 5.2 percent inflation rate, the UK treasury could incur a £3.4billion bill for benefits
starting in April next year.
The record rise in inflation is particularly troublesome for pensioners and those that are entering the final years of their working lives because they must increasingly live off savings, devote more of their budget towards energy and utilities, and of course cannot work harder or hope for salary bonuses to offset reductions in the real value of currency. In fact, because more of their spending is tied to fast-rising energy bills, the real-term effect of inflation on those aged over 75 in Britain has been 20.2 percent over the past four years, compared with just 4.4 percent for the whole population. All told, as energy bills and food prices increase, pensioners remain considerably more vulnerable, particularly those on low incomes who rely on greater state support.
To make matters worse, a majority of UK pensioners have been lured by greater immediate benefits to opt for a level 'inflation-proof' annuity when they cash out their policy. As a result, many pensioners are seeing their monthly income gradually decline as the value of the pound wavers. What many have failed to understand is that ultimately the value of one's pension could plummet if they live long enough and inflation stays high, and both events are considerably more probable nowadays than just a decade or so ago.
New data released by Standard Life this week works to confirm long-term pension fears and warn of the effects inflation could have on retirement wealth. According to Standard Life, a 90-year-old British man who retired at age 60 in 1981 with a level pension of £10,000 (US$15,800) a year would have the equivalent purchasing power of just £3,207 (US$5,067) a year today, a drastic 68 percent decline in 30 years.
Standard Life Head of Pensions Policy John Lawson wrote in the report that inflation would continue to have a considerable impact on the spending ability of pensioners in the UK. Vital utilities such as petrol, for example, now cost about £1.34 (US$2.12) a litre, compared with just 35p (US$0.54) a litre 30 years ago. These cost increases come as the average life span continues to lengthen, with a 60 year man retiring in the UK today expected to live for another 26 years on average. As people live longer, retirement incomes will need to stretch farther and more innovative and efficient savings plans will need to be utilized to guarantee elderly Britons a stable quality of life.
Standard Life's research found that 57 percent of people somewhat understood the threat of inflation to their pension and would find a retirement income scheme that could better keep pace with the cost of living in the UK particularly attractive. However, of those surveyed only 3 percent had purchased an inflation-linked annuity in 2010. The majority of respondents indicated that they had chosen a flat-rate annuity because of the higher starting income available when compared with inflation-linked alternatives. Despite lower annuity rates, Standard Life advises people approaching retirement age to consider the full spectrum of impending cost considerations and that their own personal inflation rate will be considerably higher in the future compared to the average person in the UK due to the types of products and services they will consume. "10 years in retirement, a 60-year-old man who had purchased a RPI linked annuity with a fund of £100,000 (US$158,000) could achieve a higher annual income than someone who had purchased a level annuity," John Lawson commented.
While the UK has experienced low inflation over the past decade, there has never been any guarantee that it could continue. The rising global demand for food and fuel, driven by emerging Asian powers like India and China, has come without a corresponding surge in supply and thus prices for the basic necessities across all markets have soared. A report issued by the OECD issued earlier this year confirmed that aging populations will cause global spending on long-term care to double or even triple by 2050
. Those planning for their retirement today will need to save early and often to ensure they can afford food, fuel and other essential goods for a long time into the future. The cost of these basic items will likely grow as we approach a global population of 7 billion. Standard life concludes that while pension deficit spending is indeed a national problem that needs to be confronted promptly, individuals should take action into their own hands to prepare for the future.
"There are many options to consider at retirement which could minimize the impact of inflation on your income, so seeking financial advice is vital," Lawson concluded.
Insurance Companies Mentioned
Standard Life was founded in 1825 and is headquartered today in Edinburgh, Scotland. The Standard Life group encompasses savings and investments businesses, which operate across its UK, Canadian and European markets. Through Standard Life Investments, the company manages assets of over £157 billion globally, including its Chinese and Indian Joint Venture businesses. At of April 2011 the Group had total assets under administration of £198.4billion and over 6.5 million customers around the globe.