Surging energy prices push inflation up to highest level since March

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, insists inflation can have a big impact on pensions.

She said: “Inflation is a particular challenge in retirement because income may need to last for decades.

“The state pension and final salary pensions offer some protection through annual increases, but many retirees with defined contribution pensions need to make more active choices.

“Drawdown, where people keep their pension invested while taking an income from it, gives people flexibility and the potential for investment growth, but it also exposes them to market volatility.

“Selling investments after markets have fallen can damage a pension’s long-term sustainability, so retirees should think carefully about how they fund withdrawals.

“We recommend keeping at least one year’s worth of essential expenses in an easy-access account, so income does not have to be drawn from investments during weaker markets.

“Annuities can also play a valuable role by providing guaranteed income for life, but the inflation trade-off is significant.

“HL’s latest annuity search data shows a 65-year-old with a £100,000 pension can receive up to £7,906 a year from a single-life level annuity with a five-year guarantee.

“That compares with an initial £5,585 a year from an annuity rising annually in line with RPI.

“The trade-off is between more income upfront and a lower starting income that offers protection against rising prices.

“For many retirees, a blended approach may work best, using an inflation-linked annuity to help cover essential spending while keeping the rest in drawdown for flexibility.”