PensionsJul 20 2016

Retirees caught between rising inflation and choppy markets

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Retirees caught between rising inflation and choppy markets

An uptick in the rate of inflation means retirees must choose between accepting a lower income, taking more investment risk, or spending more money on inflation-linked annuities, Aegon has warned.

On Tuesday (19 July), the Office for National Statistics reported the consumer price index rose to 0.5 per cent in June, up from 0.3 per cent in May.

While Aegon put the jump in inflation down to rising air fares and oil prices, it warned the fallout from the EU referendum meant there was “potential for further inflation in the months to come”, as a weak pound pushed up the cost of imported goods and services.

Head of pensions Kate Smith said this left retirees with some difficult choices.

“It’s possible to buy an annuity which increases in value either in line with inflation, or at a set rate each year. The challenge is that this protection is expensive to provide and as a result an annual income for life of £10,000 rising at 3 per year costs £270,000 to buy,” she said, adding this compares against just £190,000 for a flat income of £10,000.

The other option was to reject annuities altogether and opt for drawdown. This would allow retirees to keep up with rising inflation by investing in shares, which “tend to rise in line with inflation”.

However, Ms Smith pointed out the downside of drawdown was “that retirees have to contend with investment volatility and may need to reduce their income if the value of their investments falls”.

She pointed consumers faced with difficult decisions towards financial advice.

Aegon recently decided to exit the annuity market and focus all its attention on drawdown. It sold its entire annuity portfolio to Legal & General and Rothesay Life earlier this year.

People buying an annuity after the Brexit vote face falling rates, as well as rising inflation. Since the referendum result was announced on 24 June, most major annuity providers have cut their annuity rates.

james.fernyhough@ft.com