Pensions battered by basic bills

Thanks to the steeply rising cost of living, millions of pensioners are barely getting by.

Inflation -- the tendency for the prices of goods and services to rise over time -- hits every British household. However, when the cost of living rises steeply, one group in particular suffers most: pensioners.

Pensioners under pressure

Sadly, inflation is running rampant at the moment, reaching levels not seen for 20 years.

In May, the official inflation target -- the Consumer Prices Index (CPI) -- reached 4.5%, unchanged from April. In other words, a basket of goods costing £100 12 months ago now costs £104.50. Another widely used measure of inflation -- the Retail Prices Index (RPI) -- is running at 5.2% a year.

Surviving, not thriving

Sadly, according to a new report from pension provider Standard Life, millions of British pensioners can barely get by after paying their essential bills.

This is how much a typical pensioner couple can expect to spend on everyday essentials (rounded off to the nearest pound):

*Weekly expenditure*	*2010*	*2011*	*2017*
Food and drink (increasing at 4.4% a year)	£61	£64	£83
Housing, fuel and power (increasing at 4.4% a year)	£52	£54	£70
Household goods and services (increasing at 2.6% a year)	£28	£29	£34
Transport (increasing at 9.6% a year)	£66	£72	£125
Total weekly expenditure	£207	£219	£312

As you can see, Standard Life has worked out that the basic bills for a typical retired couple have increased from £207 last year to £219 in 2011, a rise of 5.8%.

Projecting these figures forward, this basic cost of living will rise to £312 over the next six years, a mighty leap of 42%. This assumes that pensioner inflation runs at 6% a year from now until 2017.

It's all in the income

We've noted the rising cost of living for pensioners; now it's time to look at how their incomes may rise. Here are Standard Life's projections:

*Weekly income*	*2010*	*2011*	*2017*
Benefit income (increasing at 3% a year)	£176	£181	£216
Private pension income	£91	£91	£91
Total weekly income	£267	£273	£308
Disposable income	£60	£54	-£4

This shows the weekly income for a man aged 65 and woman aged 62 claiming basic state pension benefits. In addition, they have turned an £80,000 pension pot into a level annuity (an income paid for life by an insurer) with a five-year guaranteed payout on a 50% joint-life basis.

As you can see, the annuity income of £91 a week this couple receives is enough to meet basic bills of £219 in 2011, with £60 a week left over. However, as inflation bites, this disposable income is whittled away until, by 2017, the couple's basic bills exceed their income by £4 a week.

Put another way, if inflation stays high and state benefits continue to rise slowly, then millions of pensioners will be flat broke by 2017. These unfortunate older people will have to use what savings they have purely to survive.

Many pensioners are already bust!

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What's more, with a pension pot worth £80,000 used to buy an annuity, the couple in the above example is better off than most pensioners.

Alas, according to the Association of British Insurers (ABI), the average private pension pot amounts to just £28,200, which is little over a third (35%) of the £80,000 assumed by Standard Life. This will buy a weekly annuity of just £31, thus reducing the weekly incomes shown above by £60.

What this means is that millions of pensioners are already seeing their entire weekly income wiped out by everyday living expenses (including food and drink; housing, fuel and power; household goods and services; and transport).

Fight back against inflation

Given the huge pressure on pensioner incomes, it's no wonder that pensioners are becoming insolvent or bankrupt at a steeply rising rate. What's more, with no end in sight to rapidly rising prices for food and drink, fuel and travel, things will get worse for those on low incomes before they get better.

Therefore, what can you do to fight back against the threat of inflation? Here are five easy steps to balance your budget:

Spend less: In a nutshell, this means cutting back on luxuries and treats, so as to concentrate on the basic bills.
Shop around: Never let loyalty leave you out of pocket. Instead, shop around online for cheaper gas and electricity, broadband, home phone and other essentials.
Don't renew that policy: You're most likely paying too much for car insurance, home insurance and other vital protection policies. Instead of renewing your cover, get fresh quotes.
Strengthen your savings: With savings rates close to all-time lows, it's almost impossible for your spare cash to beat inflation. Even so, switching to a table-topping savings account will help.
Take some risks: Several of the UK's biggest, most successful companies pay their shareholders a yearly dividend income of 5% or more. Sure, shares are risky, but the rewards are great, especially for patient investors.

Inflation is a danger to all households and not just pensioners. Even so, those folk with small disposable incomes and limited savings should worry most about the ever-rising cost of living.

More: Start saving for a rainy day! | Fight back against rising food prices | It doesn't cost much to retire well