How rising prices could hit the annuity incomes of 5 million savers

•    After a decade of relatively benign inflation, prices are expected to rise by 4% over the next 12 months
•    Inflation will particularly hit anyone with cash held in low or zero-interest paying accounts or who buys a level annuity
•    Over 5 million annuities could be exposed to rising prices, ABI data suggests
o    There were 41,526 level annuities sold in 2020 compared to just 7,092 escalating annuities – a ratio of almost 6:1
o    There were 6.1 million annuities in payment in 2019, which based on a 6:1 ratio implies over 5 million are level annuities
•    Someone with a £20,000-a-year level annuity at the start of 2021 could see its real value slump by 12% by the end of 2025*
•    Savers who cash out pensions and stash the money in a bank account risk a double whammy of inflation and unnecessary tax bills

Tom Selby, head of retirement policy at AJ Bell, comments: 

“Inflation can be a silent destroyer for savers and retirees – particularly those who lock their hard-earned savings into level annuities or stash their cash in zero-interest paying bank accounts. 

“Given there are over 6.1 million annuities in payment at the moment and level annuity sales outnumbered escalating annuity sales by 6:1 in 2020, over 5 million retirees look set to feel the pinch in the coming years. 

“Based on official projections, someone with a level annuity could see their spending power drop by 12% by the end of 2025 as a result of inflation. 

“The same would be true of anyone who has their savings stashed in a current account paying 0% interest. 

“What’s more, anyone who cashes out their retirement pot and shoves the money straight in a bank account risks a double whammy of paying unnecessary tax and then having the value of that pot eaten away by rising prices.”

How to combat inflation

“For over a decade rising prices have barely been a factor in long-term planning. Indeed, younger people may only know a world of relatively benign inflation. However, the re-opening of economies around the world means most are now expecting a spike in prices – although how long this will persist for is far less clear. 

“Anyone with large sums of money saved in a cash product should review their portfolio and, at the very least, make sure they are getting the best interest rate available.

“For medium and longer-term savings, those wanting to combat the ravages of inflation may need to consider taking some investment risk with their funds. This will give your money the chance to grow over time, although markets can be volatile – particularly over the shorter-term. 

“It is vital for those planning to invest their money – whether in an ISA, pension or elsewhere – that they understand the risks and build a balanced, diversified portfolio so all your eggs aren’t in one basket.

“Anyone wanting to buy an annuity should make sure they provide any information which could boost their rate, such as details of illnesses or lifestyle factors that could limit life expectancy. You can also buy annuities that have inflation protection baked-in, although you will get a lower initial rate as a result.”

*Based on Office for Budget Responsibility inflation projections