John Lawson, Head of Pensions Policy at Standard Life said: "Inflation can have a huge impact on the purchasing power of your retirement (http://standardlife.co.uk/
"Our research shows that 57% of people do recognise that an income keeping pace with inflation is attractive. But currently, and somewhat inevitably, the majority go for the higher starting income of a level annuity (http://www.standardlife.co.uk/
"People approaching retirement need to consider their own personal inflation rate may be higher in the future than that of the average person in the UK due to the types of products and services they will consume. After 10 years in retirement, a 60-year-old man who had purchased a RPI linked annuity with a fund of £100,000 could achieve a higher annual income than someone who had purchased a level annuity."
An example provided by the data shows the purchasing power in today's money of a £100,000 pension fund being used by a 60-year-old man retiring in October 2011 to purchase a level or RPI-linked annuity. Various rates of inflation are shown over a 30-year period. If inflation averaged 7% over a ten-year period, the then 70-year old man would begin to receive a higher annual retirement income (http://standardlife.co.uk/
Please note in this example the level annuity receives a higher starting income than the RPI-linked version. At year 10, with inflation at 7%, there is a crossover when the RPI-linked annuity annual income exceeds the level annuity annual income. At year 22, the total payments from the RPI-linked annuity exceed the total payments from the level annuity.
Lawson concluded: "Low inflation has persisted for the last 15 years or so, but there is no guarantee that it will continue. Rising world demand for food and fuel, without a similar increase in supply, has seen prices for the basics rocket. People retiring today need to consider that they will still need to pay for food, fuel and other essentials for a long time into the future and that these basic items are likely to cost a lot more in 10 year’s time than they do today.
"There are many options to consider at retirement which could minimise the impact of inflation on your income, so seeking financial advice is vital."
About Standard Life:
Standard Life is a leading long term savings and investments (http://www.standardlife.co.uk/
Standard Life (http://www.standardlife.co.uk)
19a Canning Street
0131 245 2737