Pensioners susceptible to inflation

Inflation is considered to be the biggest risk when buying a level conventional annuity by 90 per cent of advisors, according to new research by Prudential.

Annuities that guarantee a level income for life will continue to be popular but they ignore the effect that inflation could have on their retirement income.

Over the past year, pensioner inflation was 3.9 per cent, the highest for a decade, considerably above the average rate of 2.4 per cent.

Retirements lasting 20 years are fast becoming the norm, so even if the Bank of England does achieve its inflation target of 2 per cent, £1,000 today will be worth just £620 in 20 years' time.

Aston Goodey, Head of Retirement Income at Prudential, said: "Retirees don't realise the impact that even modest changes in levels of inflation will have on the purchasing power of their income, and therefore it is important to seek independent advice before choosing an annuity.

"One in four 65-year old men will live into their 90s, so securing a lifetime income in retirement is vital. Annuities can provide the security of an income for life and it is therefore important the right choice of annuity is made to suit individual circumstances."

The alternative to inflation-linked conventional annuities is the less stable profits annuities, which link the level of income to the performance of the with-profits fund. This fund has a mix of assets that grow over the long term and give returns as bonuses, which may vary from year to year.

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