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The Actuary The magazine of the Institute & Faculty of Actuaries

Prudential warns on pension threat of 'silver inflation'

Inflation would slash pensioners' income by 60% over a 20-year retirement if they took fixed benefits today, Prudential analysis reveals.

The life and pensions firm said the average 2011 retiree can expect an annual income of about £16,600 - but if that remains fixed it would be worth only £6,700 in today's money by 2031.

It said these pensioners will effectively be taking a £10,000 pay cut if inflation remains at today's levels.

They would need to more than double their retirement income - to more than £40,000 - if they wanted to maintain their standard of living for the next two decades, Prudential commented.

The firm said pensioner inflation was higher because retired people spent a greater slice of their income on goods and services, which are subject to high levels of inflation - such as food and fuel.

Head of business development Vince Smith Hughes said:"There are alternatives to a fixed income in retirement, for example choosing a flexible income plan that has the potential to grow could help many retirees to mitigate the effects of increasing living costs."

Research by Age UK recently found that ‘silver' RPI has averaged 4.6% a year since January 2008 - nearly 50% more than the 3.1% average annual inflation recorded by the Retail Prices Index over the same period.

National Association of Pension Funds chief executive Joanne Segars said: "This report shows the importance of inflation and the need to shop around for the right annuity. While getting an inflation-proofed annuity will be more expensive than a ‘no frills' approach, it's a decision that demands serious consideration.

"A much bigger problem is that the UK simply isn't saving enough for its old age. Fourteen million people are set to retire on an income that they find inadequate."