By Claire West

MGM Advantage, the retirement income specialist, has revealed the true cost of inflation and how it will affect retirees' income over the coming years. Of the 400,000 people retiring each year who purchase an annuity, 90% choose a level income.

If inflation averaged 3% over a 25-year retirement, the real value of income reduces by 53%, collectively wiping £6.3 billion off retirees' purchasing power over that period. MGM Advantage considers this a conservative figure and has based this on people retiring this year with an average pension pot of £33,000, choosing a level annuity with no escalation or index-linking.

Andrew Tully, MGM Advantage, comments: "These figures show just how damaging inflation can be, wreaking havoc with people's pensions and wiping thousands of pounds off their income over time. People close to retirement have some very tricky decisions to make when looking to convert savings into retirement income. With record low annuity rates the obvious solution could be to shop around for the best starting income you can find. However, there are other ideas to consider which could help protect your retirement income from inflation."

Andrew Tully continued: "With 90% of people retiring currently choosing a level income, we are storing up trouble for future years when you factor in the impact of inflation. While some economists forecast higher inflation over the short term, even if inflation remained at the target of 2%, the real spending power of peoples' income will reduce significantly over retirement. There are alternatives which may provide a higher starting income or the ability to hedge against the corrosive effects of inflation."