Income shortfall forcing Scots to raid savings

ALMOST three in ten Scottish adults have been forced to raid their savings in the last year to make up for income lost since interest rates plummeted. Some £60 billion of UK savings and investments have been used to cover living costs as those nearing or already in retirement struggle to cover a growing income shortfall, according to research published today by fund manager Schroders.

And it warned that with the government planning to link private sector pension increases to the lower consumer prices index (CPI) instead of the retail prices index currently used, more pensioners will in future have to use their savings to supplement their income.

The study found that 28 per cent of Scots have dipped into their savings and investments to supplement their income, compared with a UK average of 31 per cent. The figure rises to 36 per cent for those aged 55 to 64, and exactly a third of UK adults over 65 have relied on their investments to provide income in the last year.

Those still working and using their capital to replace lost income face a struggle to rebuild their savings before retiring, while pensioners relying on their capital for day-to-day expenses risk it being eroded more quickly than anticipated.

Robin Stoakley, managing director of intermediary business at Schroders UK, said the amounts being drawn down suggested it was not just rainy-day funds that were being drained.

"This is particularly an issue for those nearing or in retirement, as they have less opportunity to rebuild their savings and declining annuity income proves insufficient to cover their day-to-day expenditure," he said.

Paul Lothian, chartered financial planner at Verus Financial Planning in Dundee, said many people using their investments to make up for lost income were also looking for high returns elsewhere, with potentially damaging consequences.

"The banks are using low returns from cash as a way to entice savers into more risky vehicles, particularly bond and property funds, and income-producing structured products with limited or conditional capital guarantees," said Lothian.

The number of people forced to break open the piggy-bank is likely to accelerate, believes Ian Morrison, a financial planning consultant at Lift Financial.

"This is becoming more widespread due to the economic conditions and even those who have not had to do this in previous years are now facing this problem," Morrison said.

Inflation fell slightly to 3.1 per cent last month, but the top easy-access cash account currently pays just 2.75 per cent. To beat inflation, savers need to lock their money into fixed-rate bonds for at least three years.