What’s the rate of inflation in your household? Almost certainly not the broad-brush national figures that are trotted out every month. And the problem, says 50+ writer and commentator Tony Watts, is that unless you have a firm grip on the impact of inflation on your outgoings, incomes and assets, it’s very hard for those in retirement and on fixed incomes to make concrete plans for the future.
The erstwhile Chancellor Denis Healey denied ever making the comment that he would ‘squeeze the rich until their pips squeaked’; but the colourful metaphor has entered the English language nevertheless, and we all (rich, poor and those in between) have a pretty good idea of what it feels like to see our outgoings inexorably rising and our income falling.
Below inflation pay rises are now the norm, and as inflation starts to ramp up, this is really starting to matter.
But, arguably, those in retirement are having a harder time than those in employment. Yes, the State Pension is increased each year by the prevailing RPI rate of inflation, (unless pay inflation is higher, or both are below 2.5%). However, for many, the State Pension is just one (and often small) component of their total income. Private and company pensions are allowed to opt for the (usually lower) CPI rate. For a significant number of pensioners – those whose private company pensions went bust and whose payments are being shored up by statutory safety nets – indexation is fixed at just 2.5%.
Even relatively marginal differences (RPI/CPI often vary by around one percent or so each year) can really add up year on year on a compound basis – especially if your retirement expectation is 20 or more years. However, even that factor fades into insignificance when you consider that the rate of inflation for the retired can be hugely more than that experienced by the rest of society.
The fact is, that for pensioners, what is now commonly termed ‘Silver Inflation’ is determined by a very different ‘basket of goods’ than that of young families, for instance, by those on a mortgage (where payments have been reduced in recent years),or those who disposable income is spent on electronics and white goods (where deflation is the norm).
When a large proportion of your total income is committed to energy and food, where prices have been soaring, inflation feels very different indeed. Age UK recently announced its findings that that its ‘Silver RPI’ has averaged 4.6% a year since January 2008 –almosthalf as much again as the 3.1% average annual inflation recorded by the RPI over the same period.
Financial services provider Saga are in broad agreement, and point out that the current figures are even higher. They estimate that personal inflation is now closer to 6.6 per cent for 50 to 64-year-olds, 6.4 per cent for 65 to 74-year-olds and 6.5 per cent for those aged 75 and above.
Avoiding fuel poverty
It’s generally agreed that the lower your income, and the older you are, the higher the inflation rate. The numbers of those in ‘fuel poverty’ (where energy costs account for more than 10% of household income) has been rising in the last couple of years after well over a decade of steadily decreasing. The figure this year is expected to get back to 1996 numbers: 6.6 million households across the UK, many of which are pensioner households.
So far, so depressing. But there’s more.
At the same time as well all know, savings rates have plummeted and those going into retirement and trying to negotiate annuity rates are getting pitifully low returns for their money. Prudential recently stated that anyone taking a fixed income of £16,000 today would find it worth just £6,700 in today’s money in 20 years’ time.
Of course, you can opt to inflation-proof those sums (or at least increase them by a fixed percentage each year) and that will take some of the sting away, even though it will inevitably reduce payments now. To maintain your standard of living over that period, you would need to actually double your retirement income.
Never has there been a greater need to shop around when looking for an annuity, and taking expert (independent) advice on how and where you invest your money.
Now for the good news
So is it all unmitigated bad news? Not quite.
Some of the ways that older people can fend off above-average inflation rates are available to those reading this column: they can use the Internet to research the best deals for fuel and other utilities – many of which are only available to those happy to make do with online bills. They can also scour the Net for the best bargains when shopping for goods, travel and holidays (a luxury unavailable to the two thirds of those aged 65 and over without Internet access).
Certainly, being online allows you to search for the best rates on investments, savings and annuities – although paying a relatively small fee to an independent financial advisor may well unearth the very best deals.
It’s also worth pointing out that several billion pounds of benefits go unclaimed each year, much of that by those on relatively tidy incomes who assume they won’t be entitled. It never hurts to ask, and organisations such as www.incomemax.co.uk offer independent advice.
Scarily, at a time when energy prices are soaring, over 40% of the cavity walls and lofts in this country are not insulated to the recommended levels. Doing both will save (on average) well over £250 a year; and – because of the generous grants and subsidies available through the energy suppliers, it needn’t cost you much more than that to get the work done in the first place. What’s more, for those aged 70 and over, or on certain benefits, it can be absolutely free. Go to www.energysavingtrust.org.uk to find out more.
But there is one other overriding ‘moral to this tale’.
If you are trying to plan your future, and ensure you have enough money to see you comfortably through your retirement, you really, really do need to have a firm handle on what inflation (in all its various guises) will do to your savings, pensions, outgoings and assets in the years to come… and plan accordingly.
RetireEasy is a simple to use, interactive and highly flexible online software programme that allows you to plan your future finances – and scope out what would happen to future income and outgoings whatever rates of inflation apply. You can feed in a variety of ‘scenarios’ and it will make all the necessary calculations for you.