Pensions - freedom, choice and danger | Inflation duri...

Even with current low levels of inflation, it is important to consider how the purchasing power of your retirement income could fall during retirement.

Failing to consider the impact of inflation creates a danger that later in your retirement your pension income will not be adequate to meet your needs.

The table below illustrates how, even with lower levels of inflation, the purchasing power of a fixed income could be compromised

Value of £1 of income per year taken at retirement when you reach age 90


Inflation 2% p.a.

Inflation 3% p.a.

Age of retirement









Protecting your future income against inflation is not cheap. In the context of annuity purchase it means accepting a substantially lower initial income. For example, for a person aged 65 the initial amount of income would be 30% lower if increases of 3% p.a. were guaranteed as compared to an income which did not increase at all.

In the context of drawdown arrangements your ability to maintain the real value of your income may be linked to the investment return you get on your pension savings (and this is discussed further under that heading).