Cost of living 77% higher for over 75s
Older people face a rate of inflation 77% higher than people under the age of 30, new research reveals.
The Consumer Prices Index (CPI) – the official rate of inflation used by the Bank of England to set the base rate – fell to 2.3% in April, down from 2.9% the previous month and a peak of 5.2% last September. The Retail Prices Index (RPI) – which unlike CPI includes housing costs such as mortgage interest payments – also experienced a dramatic fall during April. It first turned negative last in March, but has now fallen further to -1.2%.
The central bank aims to keep inflation within 100 basis points of 2%. However, depending on your lifestyle and the items you spend your money on, your personal rate of inflation is likely to differ from these two measures.
New research shows that people aged 75 and over saw their personal rate of inflation fall to 3.9% in April - still 70% higher than the official rate of inflation of 2.3%.
The rate of inflation impacting older members of society is also 77% higher than that faced by people aged under 30.
Though all groups have benefited from lower energy bills and food prices, these benefits are coming through more slowly for the elderly, with the cost of basic goods and services remaining high.
Shona Dobbie, head of the Alliance Trust Research Centre, which carried out the research, says: "Although it is good to see the inflationary pressures facing the elderly begin to recede, the actual rate of inflation facing this age group remains uncomfortably high, at 3.9%. This is a particular problem at the moment as it is older people, who frequently rely on income from savings, who are also suffering the negative impact of very low interest rates.”
Generally speaking, low inflation is good news for savers, as it means their money goes further. According to data provider Moneynet, April’s fall in the rate of inflation means an account paying 2.3% is now equal to one paying 2.87% for basic-rate taxpayers, or 3.83% for higher-rate taxpayers.
While this is good news, the fact remains that average savings rates are at rock bottom. Figures from the Bank of England show that average instant access accounts paid just 0.15% at the end of April, down from 2.42% during the same month last year.
Fixed-rate accounts, meanwhile, paid an average of 2.67% (down from 5.19% the same month last year) and cash ISAs paid 0.41% (down from 4.81%).
Andrew Hagger, spokesman for Moneynet, says: ”It is good news for those that have seen their savings rates tumble since the heady days of 7% last autumn, but there’s a long way to go yet, especially for those who have had to resort to spending their capital just to make ends meet.”
He adds: “While RPI is firmly in negative territory following the fall in mortgage costs, for those without a mortgage and living on a fixed income the struggle is still not over, especially with oil and petrol prices starting to creep up again.”
For people claiming a state pension, the fall in inflation is good news. In the same way that lower inflation benefits savers, pensioners should see their income go further as a result.
In addition, this April the basic state pension rose by 5%, from £90.70 a week to £95.25.
The government generally sets the state pension each April based on the official RPI in September; however, in this year’s Budget Alistair Darling announced that next year he will recommend an increase of at least 2.5% – so people claiming the state pension will not see this decrease in 2010 whatever the level of RPI.
However, with pensioner inflation around 3.9%, according to Alliance Trust, the increase in the state pension will not match the cost of living.
Meanwhile, pensioners who purchased an inflation-linked annuity could see their income fall in the months ahead. This is because these annuity products track inflation through the RPI.
While the income from standard annuity products is static and can, over time, be eroded by rising prices, an inflation-linked product protects your retirement income as payments start off lower and increase over time.
Laith Khalaf, pensions analyst at IFA Hargreaves Lansdown, says that annuity providers use the rate of inflation three months prior to you taking out the policy. Each anniversary, the provider again looks at the rate of inflation three months previously and amends your rate accordingly.
So, people who are approaching their anniversary at the moment should manage to escape deflation – but those whose anniversary falls in the summer months could be less lucky.
Research from Hargreaves Lansdown reveals that only four of the leading insurers offer inflation-linked annuities with rate guarantees, meaning the income a pensioner receives will not reduce even if inflation does.
This means many retirees are exposed to falling retirement incomes, at a time when they are least able to afford it. At best, insurers will freeze an investor’s income until inflation returns to positive territory.
According to the Association of British Insurers, around 27,000 people bought an inflation-linked annuity in 2007, but there are likely to be hundreds of thousands people with such annuities.
Some annuities from Prudential and Standard Life will fall, while those from Norwich Union, Legal & General and AXA will not - AXA actually changed its policy in anticipation of deflation.
Khalaf says: “Pensioners suffer higher inflation than the general population yet in many cases their income will remain static because it is linked to the headline RPI figure. April’s negative figure inflation remains a significant threat to pensioners in the long term and those who are about to retire should still give serious thought to how to protect against the erosion of their purchasing power.”
He recommends people consider splitting their pension three ways, between a level annuity, a 3% escalating annuity and an RPI linked annuity. Or, they could consider drawdown if they have a larger pension pots.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Association of British Insurers
Established in 1985, the ABI is the trade body for UK insurance companies. It has more than 400 member companies that provide around 90% of domestic insurance services sold in the UK. The ABI speaks out on issues of common interest and acts as an advocate for high standards of customer service in the insurance industry. The ABI is funded by the subscriptions of member companies.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.