Arecent edition of Countryfile looked at the rural elderly and the issues specific to them, such as mobility, access to care and support etc. It also mentioned very briefly, the actual inflation rate affecting individuals and couples in this category.
You may or may not be aware but there is actually a separate pensioner RPI measure published by the Office of National Statistics www.statistics.gov.uk. The December 2009 headline RPI figure was 2.4% per annum which as is often the case was lower than that for the Pensioners Index which stood at 2.6% per annum for two pensioner households.
Whether higher or lower, this pensioners’ rate does highlight that different inflationary pressures affect pensioners than the majority of the population.
Not so interesting. What I do want to look at is how the current low interest rate is affecting savers, many of them pensioners who rely on the interest on their savings to supplement their pension income. The return of inflation and the continuation of the low savings rates on offer mean we are now back in a position of cash savings not offering a high enough return to keep pace with inflation.
A basic rate taxpaying pensioner trying to keep pace with inflation would need a return on cash of at least 3.25% per annum, and even more if their income falls between £22,900 and £28,930 as they lose their higher personal allowance.
Through most of the 90s and the 00s inflation has been relatively benign, and savings rates have consistently outstripped inflation. This is no longer the case, and cash returns are now back below inflation – you could say that normal service has been resumed.
So what should these pensioners do? Fixed term savings accounts have usually offered higher rates than the basic savings rates, simply because you are committing your cash to the bank for that much longer. Like all products you need to shop around, a one-year fixed deposit with Royal Bank of Scotland pays 2.5% which seems to be a fairly indicative rate. This is shy of that 3.25% target mentioned earlier.
A more structured approach. The start of the year has seen a large number of launches of structured products, with 80 retail products being opened in January alone.
Capital protected structured products are the smaller part of this market but probably more appropriate as an alternative for cash savings offering returns typically in the region of 4%-5% per annum gross. Capital protected structured products tend to have a term of anything between three and seven years with no capital access, and there is a risk of no return at all (if the default event occurs).
Corporate bond or gilt funds. The Bond bubble may have burst but in general bond yields are more attractive than cash, however as we all know there is a risk to capital.
Clearly the days of cash deposits giving above inflation returns have gone, for now at least. Any investor, be they a pensioner or otherwise, looking for above inflation returns are going to have to take some risk. Investors are turning to financial advisers for quality advice on low risk investments - money that would ordinarily be held in the bank is coming your way.
Tony Clements is a chartered and certified financial planner at Lothbury Group
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