‘Pensions sector should act on inflation threat to retirement’

The head of the UK strategic solutions division for investment house Schroders said the spectre of rising inflation could result in a “severe erosion” of retirement benefits in a fixed annuity.

Factors that Mr Humphreys said could accelerate inflation in the future include the UK’s growing debt mountain and the Bank of England’s prioritisation of growth over inflation.

He said: “The lack of options available for defined contribution members seeking a reasonable level of inflation-protected retirement income highlights the need for the development of new products and solutions designed to see pensioners comfortably through old age. We believe the pension industry can help with this.”

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However, he also warned that inflation-linked annuities were not guaranteed to provide a better deal if inflation did not rise beyond expectations.

He pointed to the likely “payback period” that would exceed the typical lifespan of a 65-year-old man today. For an average annuity, paid over 19 years to an individual, the breakeven inflation rate, as of 19 September, would be 3.6 per cent.

Mr Humphreys said: “With inflation at this level, the model shows that it would take around 26 years for the value of the index-linked annuity to reach that of the fixed annuity, far exceeding the life expectancy of our annuity purchaser.

This means that, unless inflation is much higher than expected, it is cheaper to purchase a fixed annuity than one with inflation protection.”

He added that DC members who choose income drawdown may find that inflation will start to bite if underlying investments underperform. Mr Humphreys said: “This option also introduces an additional risk that the member lives longer than expected and exhausts their savings.”


Recent analysis from MGM Advantage found that each household would need to spend an extra £679 a year to maintain the lifestyle as a year ago, based on the latest consumer price index data.

Adviser view

Matthew Walne, managing director of Leicestershire-based Santorini Financial Planning, said: “You cannot predict the future but Mr Humphreys is probably right to talk about our debt-fulled economy and the effect of quantitative easing when considering whether inflation will rise. People have to make sure that they have other resources to draw on, especially liquid assets, and buy-to-let is an increasingly popular option, although that is not an option for everybody.”