Hargreaves Lansdown Group  

Hargreaves flags drawdown as high inflation looms

Hargreaves flags drawdown as high inflation looms

The spectre of a rise in inflation to 4 percent in 2017 has led to Hargreaves Lansdown calling for more retirees to consider income drawdown.  

Ahead of the Bank of England's Quarterly Inflation Report out tomorrow, the National Institute for Economic and Social Research has predicted inflation could hit 4 per cent in the near term, in large part due to the weaker pound.

Consumer price inflation has been rising over recent months, reaching a 22-month high of 1 percent in September.

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Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: “Increasing inflation is the wolf at the door for retired investors, as it can halve the value of your income over the duration of a typical retirement." 

He highlights the appeal of income drawdown invested in equities and equity income funds which can produce a starting income of around 3.5 percent or £3,500 from a £100,000 pension pot.

By comparison an index-linked annuity for a 65 year old with £100,000 could buy a level income of £4,781 or just £2,480 for an RPI linked income.

Danny Cox, chartered financial planner at Hargreaves Lansdown said declining interest returns cannot match the rate at which prices are set to rise.

"The bad news for savers just gets worse. They face the continuing vicious circle of eating into their capital or taking a leap up the rungs of the risk ladder in search for inflation beating returns."

However, Daniel Clayden, director at Clayden Associates, said: "It is not a hard and fast rule that you should go for drawdown there are risks that need to be considered." 

He cited the relative complexity of the products, higher charges and the risk of the fund being eroded if withdrawals are higher than investment performance.