It’s easy to be flippant about the basket of goods, but the measurement of inflation is a serious business with serious implications – particularly for the UK’s older people.
That might surprise you. Surely the rate of inflation is the same for everyone? Yes, the Government announces a single rate of inflation across the country – but rising prices impact differently on different age groups. And the general rule is that the older you are, the more you are affected by inflation.
Clearly if you are living on a fixed income (one that doesn’t rise with the cost of living) then inflation is going to be very bad news. But even if your income does increase, the elderly will often find that their spending power is gradually decreasing.
The Government recently switched to using the Consumer Price Index (CPI) as the reference point for increasing the state pension and index linked pensions. This move away from the Retail Prices Index (RPI) immediately took a slice out of people’s spending power – simply put, the RPI increases at a faster rate than the CPI.
According to figures from Saga, someone who was receiving a £10,000 per annum pension in 2010 would have seen this rise to £10,846 in 2012, using the CPI – but had RPI been used, then the figure would have been £11,046. A difference of £200 may not seem much – after all, it’s only £4 a week – but imagine that difference compounded over 15 or 20 years. It adds up to a significant saving for the Government, and a significant loss of purchasing power for older people.
The reason older people are more affected by inflation is simple: they spend more of their money on the items which are going up most quickly, and – unfortunately – they have little choice in how they spend the money. Typically an older person will spend far more of their income on food, fuel and energy than someone who is still working. So a cold March like the one we’re currently having will be very bad news.
In the Autumn of 2012 Saga calculated that the previous five years had seen a general increase in the cost of living of 16.8%. But for those aged between 50 and 64 the rate was 19.6% and for over-65s it was a very painful 22.8%.
So what can older people do to avoid the ‘inflation trap?’ Fortunately one of the easiest steps to take is also one of the most effective – see an independent financial adviser and make sure your finances are properly organised and regularly monitored.
A good IFA will be able to give advice on the best – and most tax efficient – way to take your pension; guide you through the maze of buying an annuity and make sure you buy the very best one available; and help you get the highest interest rate on your savings.
Advice like this can make all the difference between being comfortably off in retirement – and not having quite enough. In addition, regular reviews from an IFA will ensure that your finances stay securely on track, providing essential peace of mind.
