Ways of dealing with inflation in retirement
By Nigel Callaghan | 04 Jun, 2008
The recent flow of statistics on the rising cost of living and the continuing fallout of the credit crunch has been good news for retiring investors buying an annuity, as many annuity rates have now reached a 5 year high.
However, the effect of inflation, even at quite modest levels, can be huge on a static income. A constant 4% p.a. inflation for the 20 next years would reduce the purchasing value of £100 to just £46.
A cast iron way of dealing with rising prices is to buy an inflation linked annuity. Sadly, this comes at a high price. Some insurers have substantially raised their 20 year inflation outlook to around 3.6% p.a. and this has fed through to the RPI linked annuity rates they will offer. Its starting income can be 40% lower than that for a level annuity.
An alternative is an annuity that increases at a capped fixed amount each year – say 3% p.a. This has the effect of offering some protection against the ravages of inflation, but at a lower initial cost to the investor. The starting income would be about 20-25% lower than for a level annuity.
Many investors split their pension savings to buy different types of annuity to create an income stream in retirement that best suits your own circumstances.
