Effect of inflation

In planning for a longer period of retirement - of up to 25 years or more - it's crucial to factor in the effect of inflation on retirement savings over time.

Rising at 3% per year, inflation will halve the value of a client's level income such as an annuity in less than 23 years.

At 5%, it would be only 15 years.

If recent calculations are accurate that pensioners' real inflation in 2008 is up to 7% due to above average increases in fuel and food, clients will need to reconsider just how much income they are really going to need with each passing year of retirement.

The graph below shows how the value of a level income will fall over time, with a starting income of £10,000 reducing to £5,000 in 23 years:

Cost of living

Not only will inflation on the things pensioners rely on, such as energy and food, increase their cost of living, there is also the need to factor in healthcare costs in late retirement.

With the cost of long-term care predicted to double in the next 20 years, people may require more income than they may expect in late retirement.

A retirement pot that may seem generous at age 60 may not be enough should someone live another 30 years to age 90.

This means that as well as helping clients 'accumulate' assets before retirement, it is becoming just as important to help them 'decumulate' those assets more effectively to provide income that not only lasts for a longer period of retirement, but also counters the effects of inflation and increased cost of living.