22nd September 2011

Prudential: Can people afford to live longer?

Colin Simmons, Prudential’s Business Development Manager, considers the good news and bad news.

Longevity and inflation

One in three people are now living until they are 90 years old, and many are spending nearly a third of their lives in retirement – a situation which is fast becoming unsustainable for the already financially burdened State. In addition, a whopping 658,000 people this year – and a further 806,000 next year – will reach the age of 65.

This increased longevity is to be welcomed, but the concern is that some may not have adequate income to sustain them for a lengthy retirement. Furthermore, with annuity rates at low levels, many pensioners are buying level annuities to maximise their income at outset. This of course means that their income is eaten away in real terms over time by inflation. 

Silver RPI

RPI stood at 5.0 per cent in July 2011, which is bad enough in itself. Assuming this remains the same over a 20 year period this would reduce the buying power to the extent that £10,000 becomes only worth £3,769 in today’s terms.

But it’s worse than that. Many pensioners are suffering from significantly higher inflation, also known as ‘Silver RPI’, due to the fact that the goods which they spend the majority of their money on, such as food and fuel, are the most affected by inflation. Age UK have previously measured this, and for example, the 65-69 year olds age group were estimated to have suffered from an additional inflation rate of 3.3 per cent, on top of the current RPI.

The Solution?

One possible solution to this dilemma could be the use of investment linked annuities. 

As investment linked annuities are usually invested in a multi-asset fund with investment in real assets – e.g. equities and property – they tend to have the potential for income to rise over time.  This growth potential can go some way to addressing the threat of inflation and protecting retirees’ future purchasing power. However, investments can go down as well as up therefore income is not guaranteed to rise.

Clients’ must consider both risks – investment risk and inflation risk – and opt for the annuity that is right for them.  Ultimately it comes down to what risk the client is prepared to take – an element of investment risk with the potential for growth versus  the risk of inflation eroding the purchasing power of a level stream of income.

For more information please contact your Prudential Account Manager or visit www.pruadviser.co.uk

Retirement