Pensioners need to be alive to the risk of soaring inflation after the Bank of England warned average prices could rise as much as 7.25% in April 2022.
People who bought annuities without inflation protection face a stinging hit to their spending power – if inflation runs at an average of 5% a year over the next two years, the real value of a £10,000 yearly flat-rate annuity will plummet by almost £1,000.
Investors taking an income via drawdown also need to be alive to inflation risks – particularly if larger withdrawals are made to cover rising living costs.
The state pension is increasing by just 3.1% in April this year – meaning the real value of the benefit will fall if inflation exceeds 3.1%.
Tom Selby, head of retirement policy at AJ Bell, comments: “Soaring inflation is a real and present danger to UK pensioners. One of the hardest hit will arguably be pensioners who have bought a ‘non-escalating’ annuity. These are insurance products that don’t have inflation protection baked in and, historically at least, have vastly outsold ‘escalating’ annuities with inflation protection.
“Official figures suggest that over 41,000 non-escalating annuities were sold in 2020 versus around 7,000 escalating annuities. Given around 6.1 million annuities were in force in 2019, it’s fair to say millions of people will face a severe annuity income hit in the coming years as inflation rockets*.
“While those in drawdown can invest their cash to hopefully at least protect themselves against inflation over the long-term, they may also need to withdraw more income from their fund to maintain their lifestyle.
“It will therefore be crucial that retirement investors regularly review their withdrawal strategy in the coming years, ideally with a regulated adviser, to make sure it remains sustainable.”
Leave a Comment