Retired people’s spending power could be cut by as much as 65 per cent over 25 years as a result of the headline inflation rate of 4.4 per cent, says MetLife Europe Limited.

Several market analysts also estimate that the inflation rate could rise to as much as five per cent later this year – a rate that would reduce spending power by 70 per cent over the 25-year period.

The figures illustrate how the combination of increasing longevity and inflation can have a massive impact on pensioners’ income throughout their retirement. However, it also demonstrates the need for pension products with unit-linked guarantees that can combat this twin challenge.

A report by Ernst & Young, published earlier this year, highlighted issues with current retirement products, predicting that current low rates for traditional annuities are unlikely to ‘improve substantially in the foreseeable future’ while noting that many drawdown products offer no protection against investments falling.

MetLife’s research found that 49 per cent of Independent Financial Advisers (IFAs) expect the market in variable annuities, or pension products with unit-linked guarantees, to grow over the next year.

Dominic Grinstead, MetLife’s strategic development and marketing director, says, ‘There can be no doubt that pensions with unit-linked guarantees will play an increasingly important role in people’s retirement planning.

‘Inflation and stock market volatility are very much on the minds of investors at present and these new-style products offer a great tool to deal with the uncertainty created by those factors.’