Pensioners are being urged to inflation-proof their wealth as millions who depend on income from level annuities or the state pension see big falls in their spending power.
Recent data showed the Retail Price Index (RPI) rose to 5.6 per cent whilst the Consumer Prices Index, (CPI) the Government’s preferred inflation measure, increased to 5.2 per cent.
The difference in definition for the two indices being that RPI includes mortgage payments therefore the CPI is a more realistic figure for pensioners.
We always assume that everything is getting more expensive but the story of inflation is much more complicated.
Standard Life recently produced some revealing statistics that show just how much inflation can damage your spending power. The company calculated that a 90-year-old who retired 30 years ago in 1981 would have seen the purchasing power of a £10,000 a year level pension income fall to just £3,207 today due to the effect of inflation.
If you want a straightforward example of the effects of inflation on some products in the past three decades, just remind yourself that petrol cost 35 pence per litre back in 1981.
It is the job of the Office for National Statistics (ONS) to measure fluctuation in prices for certain products and by how much.
The “basket” changes on an annual basis to mirror the Briton’s change in shopping habits and new technology in the UK.
New for 2011 are smart phone handsets, dating agency fees, oven ready joints, dried fruit, sparkling wine, MDF and craft kits. These items replacing mobile phone downloads, vending machine cigarettes, rose bushes, pork shoulder, vet fees and hardboard. The ONS collects about 180,000 separate price quotations on this basket of goods to assist in calculating CPI and RPI.
Inflation proofing annuities are one way to ensure the pension income goes some way to keep pace with increasing living costs. However pensioners will have to take a lower starting rate to accommodate the future increases.
Take for example a male 65 with a pension fund of £150,000. This would provide a level annuity of £9,016 per annum.
