Cumulative inflation has risen by 42% since 2020, sharply eroding the real value of retirement incomes, new analysis from Standard Life has revealed.
However, inflation-linked annuities have broadly kept pace. According to Standard Life, a 65-year-old who purchased an inflation-linked annuity with a £100,000 pension in January 2020 would have initially received an income of £2,900 a year. By March 2026, this would have risen to £4,050 annually, generating a total income of over £21,000.
Over the same period, a level annuity purchased with a rate of 5.04% would have delivered more than £31,000. While this has provided a higher income to date, Standard Life said inflation-linked annuities can help protect spending power over time.
Across different potential inflation scenarios, an inflation-linked annuity overtakes a level annuity between around nine and 29 years after purchase. If the high inflation seen over the past five years were to repeat, an inflation-linked annuity bought in 2020 would deliver around £46,000 over the following decade, compared with £50,400 from a level annuity, with the inflation-linked income expected to outpace thereafter.
Although 94% of over-50s say inflation is a key consideration when thinking about their pensions, Standard Life’s research shows 48% do not know annuities can include inflation protection.
Pete Cowell, head of annuities at Standard Life, said: “We’ve seen a significant cost of living shock since 2020, with prices rising sharply over the past six years.
“For those in or approaching retirement, rising prices are a key concern, and factoring in some inflation protection is an important part of planning.
“One way to manage this is to ensure fixed costs are covered, so increases have less impact on discretionary spending. Inflation-linked annuities can help provide that protection and offer some peace of mind that income will keep pace with rising costs, while another option is buying annuities in stages to benefit from higher rates as you get older.”
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