Pensions could be in real danger due to inflation

How would you cope during your retirement years if your income was to be slashed by almost half in just two decades?

That is the frightening possibility for pensioners living off a fixed income.

The danger facing all of us is seeing the value of our money being steadily eroded by inflation.

UK consumer price inflation was 3% in January - the same level as in December.

This rate may not appear too high to have much impact, but unfortunately you would be wrong.

How will this affect us?

Retirement income provider Retirement Advantage has calculated that the 3% rate of inflation will leave UK households collectively needing to find an extra £23.5billion a year to maintain their standard of living compared to 12 months ago.

It said each household will typically now need to spend an extra £864 a year.

Andrew Tully, pensions technical director at  Retirement Advantage said: ‘Inflation is the hidden force that can wreak havoc with household budgets and retirement plans. The latest numbers will leave people reeling and will hit living standards, as we will all need to find that little bit extra to make ends meet.

‘With wage growth stagnant, and inflation predicted to remain close to recent rates in the short term, the squeeze on living standards will continue.

‘For people living off a fixed income in retirement, inflation of 3% will halve spending power in just 20 years."

Retirement Advantage said the average household expenditure for over-65s is is £396.35 a week.

It calculated that, if inflation averages 2% for the next 20 years, then the future value of the above figure would drop to £266.87.

But the situation would be far worse with a 3% inflation rate for the two decades - the future value would plummet to just £219.56.

Retirement planning

It can be hard to plan for tomorrow when we’re busy living for today, but if you begin planning and saving now you’ll have more options in the future.