Pensioners set to lose £760 as inflation remains at near 40-year-highs

Martin Lewis compares pension annuity against drawdown

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Inflation was recorded as down to 9.9 percent in the year to August, a slight drop from the 10.1 percent recorded in the year to July. Yet, the data from the Office for National Statistics (ONS) is unlikely to provide much reprieve for some.

Pensioners who have opted for fixed income annuities could be losing out in real terms by a substantial sum.

Many of these individuals will have opted for an annuity due to the perception it provides stability and surety, as opposed to drawdown which is reliant on market performance.

Annuities offer a guaranteed income for life, which a person can purchase with their pension pot at or after retirement.

Those on a fixed income annuity, though, will have no ability to stop their purchasing power from taking a hit.

Inflation remaining at record highs shows there is unlikely to be a change for a while.

Analysis by financial adviser Retirement Line, shared with The Telegraph, has shown the extent of the potential issue.

Pensioners with an average annuity paying out £3,835 a year will lose out on £760 in buying power over 24 months if inflation continues at this high.

The majority of annuities sold are considered to be “level annuities”.

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This means their annual payouts are fixed, and will not rise with inflation.

The level annuity pays the same amount of regular income from the start of a person’s retirement, until the end of a guaranteed period which is usually their death.

They have been more popular than their inflation-linked counterparts, as they typically pay out more cash from the start.

Inflation-linked annuities tend to start smaller, but pay out more over a longer period of time.

With over 170,000 level annuities bought since April 2018, soaring inflation is set to hit many.

Some may still opt for annuities, however, due to the reliability they provide.

Canada Life recently announced a 14th positive change to annuities in this year alone.

As a benchmark, the firm said a reference annuity of £100,000 at age 65 will now pay around £5,746 in income a year.

This is compared to £4,542 for the same annuity purchased at the start of 2022.

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In addition, Claire Altman, Managing Director for Individual Retirement Solutions at Standard Life, recently highlighted some of the benefits of annuities, particularly in the current climate.

She said: “Annuities can help take the uncertainty out of retirement and are often the best way to optimise total income. 

“Recent stock market volatility and the return of inflation underscore the huge value of secure income to customers, particularly as rates improve. 

“So far this year, annuity rates have improved by over 25 percent which is a trend that looks set to continue. 

“The key thing is how much to annuitise and when, rather than whether to annuitise or not.”

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