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February 22nd, 2013

Inflation-linked pensions short change thousands of pensioners

Many retirees are being short changed by approximately £20,000 by inflation-linked pensions. Every year, people purchase annuities with the hopes of guaranteeing a secure, steady income, which rises gradually until they die; yet inflation-linked pensions are changing this. Crucially, a whopping 40% is cut from the starting income of an annuity in order to cover the cost of payouts; an important factor for savers as it results in them not getting any benefits from the annuity.

A 65 year old with savings of £100,000 can only expect to receive £5,502 a year, which is from the best annuity on offer today. The best inflation-linked payout begins at £3,335, yet many people will not live to reap the benefits of the payouts unless prices rise considerably each year or they live into their 90s. Tim Gosden from Legal and General has commented that insurers make a signification reduction on the first payouts as they do not know how high or low inflation will be in the coming decades and it could turn into a potentially very ‘expensive promise’.

Usually, payouts are linked to the RPI or are increased at a set rate yearly of 3% or 5%. At 3% a year, a pensioner would be in their early 80s by the time the small payouts from an inflation-linked annuity matched the fixed rate, and 97 before the total amount of two annuities amounted to the same.

Significantly, annuities have their pros and cons and it is recommended to seek financial advice before locking in to annuity and always shop around before making that all important decision.

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