Pensioners with fixed rate annuities risk losing around a fifth of their purchasing power over the next five years due to rising inflation, according to Aon Consulting.
Helen Dowsey, principal of the benefit solutions division at Aon, says the popularity of these annuities among many Defined Contribution (DC) scheme members means many will see their real incomes eroded.
With the Retail Prices index (RPI) rising by 4.2% in the past twelve months, non-retired members of DC schemes should consider other options to protect themselves from high inflation.
“60% of people who retire from DC schemes elect to receive a level pension (fixed rate annuity) that doesn’t increase each year,” she says.
“During recent periods of low inflation and with the prospect of high inflation seemingly remote, this option has appeared most attractive to retirees.”
Alternatives seemed unattractive during the past decade of low inflation, according to Dowsey, because they were generally more expensive. However, those currently saving for their pension should consider taking measures to protect themselves.
Aon Consulting suggests choosing to invest in asset classes that offer inflation protection, while some asset classes, such as equities, tend to offer good inflation protection, particularly for younger workers.
Dowsey recommends index-linked gilts for those nearer to retirement, which have been unpopular during recent low inflation periods, but may become more popular again as inflation rises.
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