The pensions technical director of provider MGM Advantage argued that 90 per cent of pensioners who pick a level income could “be storing up trouble” by forgetting about the effects of inflation.
Mr Tully said that £6.3bn was a “conservative” estimate for the amount that could be wiped off the purchasing power of pensioners if inflation were to average 3 per cent over 25 years.
He urged advisers to consider various strategies to combat inflation, such as escalating or investment-linked annuities, depending on clients’ circumstances.
To help raise awareness of the corrosive power of inflation, MGM Advantage has published a joint guide with fund manager Jupiter, which can be found on the MGM Adviser website.
Mr Tully said: “These figures show just how damaging inflation can be, wreaking havoc with people’s pensions and wiping thousands of pounds off their income in time. People close to retirement have some tricky decisions to make when looking to convert savings into retirement income.”
Some economists forecast higher inflation in the short term, but if it remained at the target of 2 per cent then the spending power of pensioners’ income would be reduced significantly in retirement.
Mr Tully added: “There are alternatives that may provide a higher starting income or the ability to hedge against the corrosive effects of inflation.”
Adviser
Tom McPhail, head of pensions research for Bristol-based Hargreaves Lansdown, said it was important to shop around at retirement. He added: “With millions of new pension savers being enrolled into defined contribution pensions it is vital that the government sets minimum standards to ensure that they get the best possible pay out at retirement.
“Our research has shown that 56 per cent of pensioners can qualify for an enhanced annuity. When this is combined with a shopping around process pay-outs can be increased by as much as 40 per cent.”
Bubbles
40% – the increase possible through shopping around.
90% – the number of pensioners potentially at risk from inflation.
£6.3bn – a conservative estimate for how much pensioners could lose to inflation.
