Higher Inflation Rips Into Pension Spending Power

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Rising inflation is back to haunt pensioners living on a fixed income as the cost of living has soared to the highest rate for nearly four years.

UK inflation climbed to 2.7% in April from 2.3% in March and 0.3% a year earlier.

The Office of National Statistics disclosed the Consumer Price Index (CPI) last reached the same level in September 2013 and that the year-on-year increase was the highest since 2007.

The rise was triggered by moving the Easter holiday to different dates and higher air fares.

“The increase reflects the timing of Easter this year and is like the seasonal uplifts seen in other years when the Easter holiday was in April. In contrast, the Easter holidays fell in March 2016, and the uplift in prices was seen in the March 2016 data,” said the ONS.

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Savings feel the pinch

Other rises in the cost of clothing, vehicle excise duty and electricity also contributed to the increase, while a fall in the pump prices for car fuel offset their impact.

“The rise in inflation for the third month in a row is likely to damage retirees’ buying power and is set to take out a serious chunk of peoples’ nest eggs,” said Elliott Silk, commercial director at wealth manager Sanlam.

“As bills rise across the board, retirees on a fixed income begin to feel the inflation pinch. As we enter this period of increased inflation, one of the ways people can consider avoiding inflation eating away at their hard-earned cash is to seek out alternative investment vehicles.”

Pensioners hit hard

Inflation eats into retirement savings by eroding any returns on investment, seen as a reduction in spending power. If a fund is offering a 3.5% yield with inflation at 2.7%, the inflation-adjusted return is 1.2%.

“Inflation can hit people on fixed incomes hard, particularly pensioners,” said Kate Smith, head of pensions at provider Aegon.

“As people are living 20 or more years in retirement they need to think seriously about how they can protect themselves from the ravages of higher inflation eating away at their income and savings. Planning and investing to outstrip the destructive effects of inflation could help maintain purchasing power.”

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