Research from Legal & General shows that most people opt for a fixed, level pension plan, despite the fact that inflation rates have varied between 1.03 per cent (2002) to a high of 18.01 per cent (1980) in the last 25 years.

Andy Agar, Legal & General’s Director Pensions Marketing, explained, ‘This is worrying because the effects of inflation on a level pension income – even at today’s low levels – are significant as people who retire at 65 will now live, on average, for a further 20 – 25 years.’

Today’s retirees could see a number of changes in inflation policy over the next 25 years, with the current low rates far from guaranteed.

For example, a man retiring at age 65 with a pension fund of £30,000 could buy a level, single life pension of £2152.00 per annum. The effects of inflation over 25 years, even at today’s low levels, mean that the purchasing power of this pension is reduced to around £1160.00 (assuming inflation at a rate of 2.5 per cent per annum, the Government’s target rate as confirmed by the May 2003 Inflation Report.)

Mr Agar continued, ‘While choosing a pension which is index linked means that customers start with a lower initial level of pension (£1562.28 per annum when compared to a level pension of £2152.08), this income level will increase with inflation on prices and so they can be confident that their pension will help them maintain their standard of living during retirement, regardless of how many Chancellors live in Downing Street.’