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Lost amid the furore over the tax on higher-earners’ pensions is the news that pensioners of all wealth groups will actually see their income fall as Britain slips into deflation.

Given that their longer-term worry is more likely to be inflation than deflation, this is perhaps a good thing but this will be small consolation for those affected. If I had accepted an income 35 per cent lower than was on the table for taking the prudent step of protecting myself against inflation, I would be disappointed to see my income going down.

Yet this is the reality facing over 40,000 pensioners after the UK slipped into deflation for the first time in half a century. The fall in RPI inflation to -0.4 per cent in March means some, annuitants, albeit a small proportion, who bought products from some providers, will see their retirement income fall. Those who took products from Axa, LV= (formerly Liverpool Victoria) and Legal & General are OK because these providers have decided not to cut rates to reflect the deflation figures.

Hundreds of thousands more could see their pensions treading water even once RPI turns positive because while the majority of inflation-linked annuities offer deflation protection, many still require prices to rise above where they were the last time a rise was given before further increases are added.

Lower incomes will not filter through to consumers until June because there is a three-month time lag before RPI adjustments are made. Not everyone with annuities without deflation protection will be affected if deflation lasts less than a year as rates are adjusted to reflect the monthly inflation figures at the anniversary of the purchase of the annuity.

The good news is these cuts are expected to be short-lived. A report from the National Institute for Economic Research this month predicts RPI deflation of 1.9 per cent in 2009 followed by subdued inflation of 0.7 per cent in 2010 and 1.6 per cent in 2011.

At a time when the Government is printing money, you do not have to be an economics professor to realise the possibility of a spike in inflation could be just around the corner.

Economists point to three factors that could bring inflation back with a vengeance – quantitative easing, the low oil price and the size of public sector debt. The low oil price means exploration is subdued at present. If demand increases in future, so too would the cost of oil. As for public sector debt, future Governments may be prepared to accept a higher level of inflation to reduce in real terms the burden it places on state finances.

The risk of inflation over the long term remains real and the options open to IFAs to combat it looks set to fall. Exposure to equities is one obvious way to do it and Prudential’s Income Choice product may turn out to be well-timed but the withdrawal of Hartford Life from the UK variable annuity market has sent shockwaves through the sector.

The Hartford’s departure is bound to create questions in the minds of IFAs as to the long- term commitment of other overseas providers new to the UK market. With several of those providers still offering variable annuities raising the cost of their guarantees, the proposition has to look less attractive than it did.

At a time when equity prices are arguably good value, the temptation for some may be to do it yourself through a combination of income drawdown and partial annuitisation. For those that can afford the risk, that has to be a more appealing proposition than the painfully low rates on offer from RPI annuities.

John Greenwood is editor of Corporate AdviserMoney Marketing

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