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Inflation could cut retirement spending by 40%

Increased longevity and inflation can cut people’s spending power in retirement by as much as 40 per cent over 25 years, according to Ernst & Young.

A new report for MetLife Europe estimates that this could occur if annual inflation sits at two per cent. If inflation rises to five per cent over the same period spending power would be cut by 70 per cent.

However the report predicts that increased longevity and long-term economic factors will create “big opportunities for providers and advisers” if the financial services industry looks to provide new solutions.

The report also says the introduction of Personal Accounts under the National Pension Savings Scheme could deter consumers from saving while encouraging employers to “dumb down” their pension schemes.

Ernst & Young director Malcolm Kerr says: “Changing attitudes to retirement create substantial opportunities for providers and advisers but at the same time create threats. With high expectations of retirement there is a clear risk of disappointment should retirees’ pension provision prove inadequate.

“Financial planning and product solutions will need to support the aspirations of retirees whilst also addressing their key concerns. An intelligent, successful and more confident generation of affluent retirees is beginning to emerge – clear on their priorities and preferences.”

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