It's getting cold for pensioners

Melanie Bien shows how to ensure your standard of living survives in retirement

For the second year running, retired couples have suffered a drop in their real income. In the past 12 months, according to new research, their standard of living has fallen by 2.9 per cent, resulting in a disposable income of £346 a week compared to £350 last year.

For the second year running, retired couples have suffered a drop in their real income. In the past 12 months, according to new research, their standard of living has fallen by 2.9 per cent, resulting in a disposable income of £346 a week compared to £350 last year.

The findings, from Britannic Asset Management's Retired Income Monitor, under- line the importance of saving as much as you can for retirement while you can afford to do so.

Retired couples have had a difficult year as their disposable income has not kept up with the rise in price of the average basket of goods, falling back to what it was in 2000. As a result they are worse off in real terms.

Several factors have contributed to this. The poor state of the stock market means income from investments, annuities and private pensions – which account for 41 per cent of retired couples' income – have all been lower.

"Once they retire, people face an income challenge if they are to maintain their standard of living year on year," says Francis Ghiloni, director at Britannic Asset Management. "You can't improve your annuity or your company pension after you retire, but you can make the most of any spare cash you have by seeking a good source of income."

Britannic's research shows that not all pensioners are suffering: people who are single and retired have enjoyed an 11.2 per cent rise in their standard of living in the past 12 months. And even though the stock market has been in the doldrums, the investment income of these people has gone up from an average of £35 a week to £59.

Britannic believes this is because singles are more aware of how to make their money work in retirement. "They are also likely to have a different risk profile to couples, who are more cautious and want to keep more money in savings accounts," says a spokeswoman. "Also, the cost of the average basket of goods was more expensive for couples two years ago so they may have eaten into their capital, which could account for the fall in investment income."

Overall confidence in stocks and shares has decreased among the retired, as has their confidence in annuities and savings accounts. In the past year they have felt more confident about bank and building society accounts and investing in property.

The research reveals how important it is for the retired to ensure their money is working as hard as it can. "You have limited options apart from squeezing as much cash as you can out of what capital is available to you," says Tom McPhail, pensions research manager at independent financial adviser Har- greaves Lansdown.

"If you have already taken out an annuity, you are stuck with that rate and can't change it. If this is the case, you need to look at your other investments and make sure your money is working as efficiently as possible."

The place to start is your savings. You should ensure that any money you have on deposit attracts the best rate of interest, particularly as many accounts are poor payers. If you have access to the internet, this is where you'll find the best deal. Cahoot pays 4.15 per cent on balances of £1, as does the Northern Rock Tracker Online. Nationwide's e-savings will earn you 4.05 per cent.

Even if you don't have internet access, you can still find good rates. The Legal & General Easy Access Tracker is available via telephone or post and pays 3.53 per cent interest. If you prefer walking into a branch, Alliance & Leicester EasySaver pays 3.5 per cent, and Nationwide InvestDirect 3.4 per cent.

These are all easy access savings accounts. If you want to earn some cash tax-free, you can invest up to £3,000 each tax year in a mini cash individual savings account. Safeway is paying the best rate: 4.5 per cent.

Well-managed equity income funds are also a good bet in the current market, with yields running at more than 5 per cent. Robert Burdett, co-head of the Credit Suisse Private Portfolio Service, likes Credit Suisse Extra Income, Liontrust First Income, Artemis Income and Invesco Perpetual Income.

For those who have years to go until retirement, it's never too early to start saving. "Don't leave things to chance, even if you are a member of a final salary scheme," warns Mr McPhail at Hargreaves Lansdown. "Don't take anything for granted as that scheme may not be around in 10 years' time. And don't rely on the government to bail you out, either."

Work out how much you need to save for the retirement you want. A pension calculator such as the TUC's (see below) will spell it out. Then it is up to you to decide on the best way to achieve that sum.

Think beyond pensions, as diversification is a good idea. "Get the tax relief from a pension, and put money in an ISA and property," suggests Mr McPhail. "Don't put all your eggs in one basket."

The TUC pension calculator is at www.workSMART.org.uk