A valuable inflation lesson for those about to retire.
1st April 2016 brought a wave of general price increases for the British public. It was announced that Council tax bills in England and Wales are to rise. Water bills, prescription and dental charges are to be increased, and the cost of air travel is going up. Even O2, EE and Three announced they were increasing the prices of their monthly contracts for some mobile phone contracts*.
Whilst no-one likes the news that the cost of living is rising, a single day where so many price increases are announced acts as a timely reminder of the need to continually raise our own level of income. This isn’t just important in our working life: it also matters in retirement too, but it can be harder to achieve.
People often ignore the risk of inflation when it comes to deciding how to use their pension savings to provide an income. This is irrespective of whether they have chosen to use the new pension freedoms to invest and draw an income, or if they chose to buy a guaranteed income for life by purchasing an annuity.
The most obvious example of this is when people buy a lifetime annuity, which provides a guaranteed income for life. There are different options available with an annuity, one of which is whether to choose an income which is index-linked where the income you receive will rise annually, either by a set percentage, or in line with inflation, or one which is not index-linked, so the amount paid stays the same every year.
An annuity which is not index-linked typically pays a higher annual sum at the beginning, but over the years, the index-linked annuity soon catches up and over takes it in terms of income paid. Whilst many people understand that the cost of living goes up each year, many don’t buy an index-linked annuity and choose instead the short term gain of the initial higher income, even with the understanding that there will be the inevitable pain of a stagnant income over time.
There is little financial flexibility when you hang up your coat and hat from employment. The opportunities to work overtime, take a second job or say yes to a freelance job when you need a little extra cash are not so readily available. It is why it is so important to take good financial advice before you retire.
Pension freedoms give those with a personal pension flexibility on how retirement savings can provide an income, and it is important that the choices made ensure that there is enough money to provide enough to live on right until the very end.
If you would like to find out more about your options at retirement, or how to inflation-proof your retirement then please get in touch, we’d love to help.