Inflation at 3% diminishes flat rate pension’s value by 53% over 25 years

24th June 2013

Hundreds of thousands of UK retirees could see more than £6bn wiped off their spending power as a result of the corrosive impact of inflation.

According to the retirement income specialist MGM Advantage, some 360,000 people retiring each year could find their combined spending power fall by £6.3 billion over a 25-year retirement due to the effects of inflation.

Just last week, official data showed that UK inflation had jumped from 2.4% in April to 2.7% in May and further rises are anticipated before any potential tapering.

If inflation averaged 3% over a 25-year retirement, the real value of income reduces by 53%, collectively wiping billions off retirees purchasing power over that period. MGM Advantage considers this a conservative figure and has based this on people retiring this year with an average pension pot of £33,000, choosing a level annuity with no escalation or index-linking.

Andrew Tully, MGM Advantage, says: “These figures show just how damaging inflation can be, wreaking havoc with people’s pensions and wiping thousands of pounds off their income over time. People close to retirement have some very tricky decisions to make when looking to convert savings into retirement income.

“With record low annuity rates the obvious solution could be to shop around for the best starting income you can find. However, there are other ideas to consider which could help protect your retirement income from inflation.”

At retirement, savers usually cash in their pension to purchase an annuity, which then provides a guaranteed income for life but annuities can come in different shapes and sizes, which is why experts always recommend shopping around for the best deal.

To tackle the impact of inflation savers could opt for an escalating annuity, which rise in line with inflation but retirees will often find the starting income is significantly lower than other options. For savers with a pre-existing health or lifestyle condition, they should look at enhanced annuity options which can add up to 40% to their income. There is also the option of investment-linked annuities, which invest in equities and other asset classes providing a hedge against inflation, although this comes with a level of risk.

MGM Advantage has published a guide to the effects of inflation in retirement in association with Jupiter which can be downloaded here:


9 thoughts on “Inflation at 3% diminishes flat rate pension’s value by 53% over 25 years”

  1. dutch says:

    ‘If falling bond yield provide a real benefit for an economy why have we
    not seen it from the substantial falls already experienced?’

    You’ll never get to run the BoE asking questions like that Shaun.

    A few years back there was a great blog by a whistleblower in the French civil service,who described the ‘five hours a week culture’ therein.Aurélie Boullet .

    From the sounds of the driving school,it sounds like nothing has changed.

    1. Anonymous says:

      Hi Dutch

      I read again and again in the media that the ECB needs to do QE to bailout the Euro area. This is usually combined with a large number like one trillion Euros. However they do not ask what gains would physically come from it? So far any impact has been weak if we manage to measure it at all.

  2. Forbin says:

    Isn’t about time the Euro was dropped and everyone took on the dollar

    thats what African countries do when they’re in the mire !

    never mind , everything is on T’rack , as they say


    1. Anonymous says:

      Hi Forbin

      We could indeed go for a world single currency where the only challenger to the US Dollar would be the Special Drawing Rights (SDR) of the International Monetary Funds. The issue for the SDR would be how few people know what it is!

      Of course as economies diverge we would see more and more chaos unless you are also recommending political and fiscal union with the US?

  3. Anonymous says:

    Great column, Shaun, as usual.

    The French economy is more likely to go into recession as it has been harder than most by the Russian sanctions against agricultural imports. According to Figaro (“Les industriels français de l’agro-alimentaire inquiétés par l’embargo russe”, August 8), France could lose 11.8 million euros of sales on fruit and vegetables, dairy and meat products. A lot of French meat exports consists of offal, a low demand product. It could be sold in other Eastern European markets or in African markets but only at a cheap discount. So far too the Russian food sanctions have targeted perishable goods which can’t be held in inventory long to ensure that producers suffer. However most of French agricutural and food industry exports to Russia consist of wines and spirits, which are so far exempt from sanctions. If the pump-it-up crowd have their way, and ratchet up EU sanctions against Russia another notch, this would be the next logical step for Russia, extending the sanctions to include wine and spirits. I’m sure Russian consumers could do without cognac a lot easier than they could do without meat. Besides the direct costs to French agriculture there would also be the indirect costs imposed by a lot of food from other countries exporting to Russia seeking markets and lowering prices. Of course this would also be of benefit to French consumers.
    Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      The other risk for France from an increase in sanctions is what it would do with the two Mistral class amphibious carriers it is building for Russia? Also Germany is showing more and more signs of a slowdown with today consumer confidence dipping. So it will be an interesting end to 2014 to say the least.

  4. Eric says:

    Hi Shaun. Another good piece.
    I sometimes wonder how successful the EZ project would have been had it not been for the effects of the global credit crunch. I think it would have been in trouble in any event. Any thoughts?

  5. Anonymous says:

    Hi Mike and welcome to my part of the blogosphere.

    Common currency suggestions appear from time to time and by it I assume that you mean that the Euro would be a common currency but that the national currencies would also have survived. I think that this would pose as many questions as it would answer as we would have had stages when nobody wanted individual currencies. How then would convertibility be ensured?

    Perhaps the crisis would have been a slower burner..

  6. Anonymous says:

    Hello, Mike. As usual, I think Shaun has the right idea. A common currency would have posed as many questions as it answered. Just thought I would mention that I really enjoyed Norman Lamont’s memoirs “In Office”. On p. 112-114 he speaks about pushing the idea of a hard ecu, a common currency alternative to the single European currency, as Chancellor of the Exchequer, on the urging of PM Major who himself had pushed the idea when he was PM Thatcher’s Chancellor of the Exchequer. Mr. Lamont wrote: “John Major was right. The hard ecu would have been a more realistic evolutionary approach than the rigid, grand blueprint that had been drawn up by the Committee, chaired by Jacques Delors.” Mr. Lamont is a brilliant man, but I don’t think he is right on this issue. The German economist, Peter Bofinger, wrote a paper on “The Political Economy of the Hard Ecu Proposal”. He wrote that “the proposal is half-baked”, and it is hard not to agree with him. It’s funny the staying power of this idea though. A few years back some of the same people who were in favour of the hard ecu were pushing for Greece to introduce a hard drachma.

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