Inflation proofing retirement savings is an unaffordable dream for many planning a comfortable financial retirement.
Figures released by a leading insurance company reveal that the cost of index-linking an annuity is well beyond the reach of an average retirement saver.
Depending on the data source, the average pension pot ranges between £39,000 and £53,000.
But Aegon, one of Britain’s leading pension providers, has released some staggering figures that disclose just how much someone needs to save to fund even a modest retirement.
A 65-year-old would have to buy a £190,000 annuity to give a guaranteed income of £10,000.
The figures savers need to know
That is a flat-rate annuity without any cost of living increases that will diminish in spending power as the retirement saver grows older.
The Bank of England is targeting annual inflation of between 2% and 3% – but to buy an index-linked annuity that generates £10,000 in income and increases at a rate of 3% a year, a retirement saver would need a pension pot of £275,000.
To cover 5% inflation, the pension pot would have to be around £360,000.
The firm’s analysis points out the index linking to account for the cost of living rising by 3% is worth £85,000 to the pension saver who spends 20 years in retirement and 5% is worth £170,000.
To put the figures into perspective, a flat-rate annuity giving a £10,000 income with no index-linking have an equivalent spending power of £7,440 after 20 years if inflation increases at 3% a year.
Pensions face unknown future
Aegon said that the figures were worked out because savers need to realise what they can lose if they fail to properly plan for retirement, especially as rumours are abounding about the future of the state pension and final salary workplace pensions.
Many financial experts are suggesting the government cannot afford to maintain the triple lock state pension pledge and companies will dump expensive defined benefit pensions.
“An increasing number of people with a defined contribution pension need to choose whether to opt for a higher initial income that doesn’t increase, or a lower initial income with yearly increases. This can either be through taking income through drawdown or by buying an annuity with built in pension increases,” said the firm’s head of pensions Kate Smith.
“People may feel that in a low inflationary environment this isn’t important, but more people are living 20 plus years in retirement and even low-level inflation can erode their income over time.”
