MetLife has warned that persistently high inflation would cut retirement incomes by 16 per cent over five years.
The analysis is based on average annual consumer price index inflation of 3.45 per cent over the next five years. CPI inflation is currently running at 5.2 per cent, more than twice the Government’s target of 2 per cent.
MetLife says a 60-year-old taking a £6,180 annual income from a £100,000 pension fund today will see the real value fall to just £5,215.98 in 2016 if inflation averages 3.45 per cent. At the age of 75, the same pension will be worth £3,715.62 in real terms, 40 per cent lower.
Within 25 years the value of the annuity will be just £2,646.83 – 57 per cent less than it was originally worth.
MetLife UK managing director Dominic Grinstead says: “The new retirement reality means planning up to 25 years in retirement is a risk to anyone on fixed income.
“Pensioners have to live with the decisions they make on retirement income so providers need to focus on innovation and offer more flexible solutions which enable people to maintain control of their retirement.”
Radcliffe & Newlands chartered financial planner Mel Kenny says: “Inflation is expected to fall over the next couple of years but people do fear an inflationary future. Coupled with the silver index, which highlights a higher inflation rate for senior citizens than the reported rate, this is an area of concern.
“Locking into a level annuity without inflation-proofing income elsewhere should be treated with extreme caution.”