Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Inflation is one of the biggest issues retirees will need to consider when planning their retirement income.
“You could be retired for 20 years or more, and over that period you are going to see inflation fluctuate. This will have big impacts on your purchasing power.
“There are several options available if you are looking to manage the impact of inflation.
“You may decide to opt for an inflation-linked annuity where the income increases every year.
“The issue here is that the starting income from these annuities is much lower than what you would get from a level product.
“As an example, data from the HL annuity search portal show a 65-year-old with a £100,000 pension would get up to £5,761 per year from an annuity that rises three per cent per year.
“This compares to up to £7,701 from a single life level annuity with a five-year guarantee.
“You need to consider whether you can manage on the lower starting income and also how long it will take for the income to catch up with that from a level annuity.
“Another option is to remain invested in the markets through income drawdown.
“This will enable you to draw an income that meets your needs while hopefully benefiting from investment growth that will help you preserve your purchasing power.
“However, you don’t have to go all in on either income drawdown or annuities – you could consider a combination of both.
“You could annuitise in stages throughout retirement depending on your needs while leaving the rest invested in income drawdown where it can continue to grow.”
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