Retirees set to lose billions
Millions of Britons due to retire over the next few years face a 'double whammy' that risks seeing £11.5 billion wiped off their retirement funds, according to a new report by the Saga Foundation.
This figure takes in the impact on pensioners of tax and benefit changes, including the freezing of age-related allowances from April 2013 and the reduction in winter fuel payments, alongside rock bottom interest rates and three rounds of quantitative easing.
Compiled for Saga by experts from the Centre for Economics and Business Research, the report concludes that the changes will cost pensioners an average of £1,318 each by 5 April 2014.
Dr Ros Altmann, director general of Saga, says: "Pensioners are being hammered. They didn't cause our economic meltdown yet they have been paying a heavy price as we try to fix it and they face an even tighter financial squeeze in future.
"Those retiring now are the biggest losers in life's pension lottery as tax and benefit changes will compound the misery wreaked by paltry savings rates and overshooting inflation."
On the breadline
The report shows that the 40% of single pensioners who sit in the lowest income bracket are forced to get by on just £8,034 a year with couples living on just £13,883.
The average income of the next 40% of pensioners is £13,104 for single households and £23,998 for couples, while even the wealthiest 20% typically only receive £20,332, well below the average national income.
Altmann adds: "Instead of pumping hundreds of billions of pounds into financial markets and bank balance sheets it would have been much better sending cheques to everyone to encourage them to spend.
"If older generations felt confident again, they would splash out and boost economic growth. If we keep hammering them, these grey pounds will be wasted."
Alliance Trust Research Centre's study of inflation rates affecting different age groups shows that over the past two years, pensioners have suffered a higher rate of inflation.
Over the past two years, those aged 65-74 and those households aged 75 and over have faced an inflation rate averaging 4.4%, higher than the official Consumer Prices Index average of 3.8%.
A spokesperson for Alliance Trust says: "This is simply because these households allocate a larger proportion of their budgets to utilities and food, areas that have seen elevated levels of inflation in recent years. The over 75-year-old households, for example, allocate almost 17% of their budgets to food, higher than any other age group."
With little prospect of rates on savings accounts rising coupled with the gloomy economic outlook, pensioners are particularly vulnerable in the current climate.
Michelle Mitchell, Age UK's charity director general, says: "Many of those on a low income who had managed to build up a small retirement pot are facing a significant loss in savings due to historically low interest rates."
However, she adds that conditions could improve, saying: "Future pensioners should benefit from the government's plans to bring in a flat-rate state pension that aims to make the system more straightforward and easier to navigate.
"But the needs of the 1.7 million pensioners currently living in poverty must not be overlooked by the reforms and the government should be working harder to find ways to ease their hardship. Too many older people are put off by the process of claiming benefits or are simply unaware that they are entitled to extra help, which could have a huge impact on their finances and quality of life."
This article was written for our sister magazine Money Observer
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
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).
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.