Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Inflation may be nowhere near the double digit figures we saw in the recent past, but it’s still an important consideration for retirees.
“Making sure your income can withstand inflation’s effects on your purchasing power over the course of your retirement is a key factor in your planning.
“If you are on the look out for a guaranteed income, you need to consider whether to opt for the higher income of a level annuity or the lower starting amount offered by an inflation linked product.
“As an example, the latest data on HL’s annuity search portal shows a 65-year-old with a £100,000 pension can get up to £7,661 per year from a single life level annuity with a five-year guarantee.
“If they opted for an inflation linked product that grows every year at 3 per cent then the starting income is £5,740.
“You have the comfort of knowing your income will grow but the reality is it will take several years before it gets close to that of the level product, so you need to weigh these options up.
“Income drawdown allows you to remain in the market and investment growth should help protect against inflation.
“However, you also have to beware that markets can go down as well as up and so you may have periods of time where you need to take less income.
“This is why we suggest retirees keep between one and three years of essential expenses in an easy access account that they can use to supplement their income when needed. Of course, it’s not an either/or decision between annuities and drawdown.
“You can mix and match the two to keep a level of guaranteed income to meet your essentials while also retaining the flexibility of income drawdown.”
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