Deflation hits prudent savers' buying power

PRUDENT savers who have taken out inflation-linked annuities could find their retirement income falling now that inflation has turned negative.

Legal General policy values will not fall Legal & General policy values will not fall

Annuities linked to the Retail Price Index (RPI) — one of the two main measures of inflation — have been popular among those who do not want to see their pension income eroded as a result of rising prices.

But the announcement yesterday of the RPI falling to -0.4 per cent has taken the UK into deflation for the first time in 50 years.

Where the income is specifically linked to RPI, it would normally be expected to reduce in line with any falls in prices.

But some annuity providers have said that they will not cut income when inflation enters negative territory.

Retirement specialist LV= has confirmed that its annuity customers whose income is RPI-linked will not be affected.

According to Laith Khalaf at adviser Hargreaves Lansdown, Norwich Union, Legal & General and Axa policy values will not fall but will not rise again until RPI returns to the same level.

Prudential and Standard Life do offer policies that will not fall but their standard RPI annuities will fall in line with RPI.

Matt Trott at LV= said: “As we are now in a period of deflation, a lower income for RPI-linked annuities would normally mean that the same purchasing power is maintained.

However, living costs for pensioners are not falling as fast as the RPI index indicates.”

Would you like to receive news notifications from Daily Express?