Soaring inflation to hit retirement plans for thousands of UK pensioners

In light of rising inflation and with the Retail Prices index increasing by 4.2% over the past twelve months, Helen Dowsey, principal in the benefit solutions division of Aon Consulting commented:

ìFor retired members of defined contribution (DC) schemes, high inflation rates will have a severe knock-on effect. Indeed at its current rate, individuals already face losing around one-fifth of the purchasing power of their pension over the next five years and potentially even more if inflation rates continue to rise.

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ì60% of people who retire from DC schemes elect to receive a level pension (fixed rate annuity) that doesnít increase each year. During recent periods of low inflation and with the prospect of high inflation seemingly remote, this option has appeared most attractive to retirees. The alternative option of choosing a pension that increases has historically been more expensive and thus less appealing. However, the majority of individuals who have bought into fixed rate annuities are likely to now experience a severe erosion of the purchasing power of their pension because of the rising rate of inflation.

ìWhilst there is little protection for retired pension scheme members, existing members need to take measures to defend against such negative implications. Individuals should consider investing in asset classes that offer inflation protection to safeguard their pension pot. Over long periods of time equities have tended to provide an element of inflation protection and therefore investing in equities, particularly for younger workers, should help. For those approaching retirement, the most appropriate asset class may be index-linked gilts. Interestingly, this asset class has been rather un-fashionable in the last few years in times of low inflation.î