Pensioners drawing down an income from their pension savings will have to “think again” when considering how much they are to take from their funds following the recent inflation rise, Prudential has noted.

In the 12 months to January 2017, UK inflation, as measured by CPI, rose to 1.8 per cent, the third monthly rise in a row and increasing from 1.6 per cent in December 2016.

This rate is currently the highest inflation figure since June 2014 and has been attributed to rising fuel prices and a gradual termination of food price deflation.

While the figure was slightly below economists’ predicted 1.9 per cent increase, UK consumer price inflation is, however, “creeping towards the Bank of England’s 2 per cent target,” Hargreaves Lansdown senior economist Ben Brettell commented.

Brettell added: “The market reaction was relatively muted, with the FTSE largely unaffected and the pound losing around a third of a cent against the dollar… By the end of the year price inflation looks set to outstrip wage growth, which will squeeze household budgets in the short term.”

In response to the impact of the inflation figures on pensions, Prudential retirement expert Vince Smith-Hughes said: "Although research has highlighted some pensioners are enjoying higher levels of income, others are much closer to the breadline. Inflation has been consistently rising over the last three months, which will squeeze the living standards of retired people living on a fixed income, particularly as they often spend a disproportionate amount of their income of fuel, food and heating.

“Pensioners drawing down an income from their pension funds and savings will have to think again about how much they draw from their funds, particularly with the volatility we are seeing in investment markets. Increasing the amount of income they are taking from their pension or savings to meet the rising prices means they run a greater risk of exhausting their pension and savings.”

Looking to the future, many have speculated that CPI inflation is likely to rise further in the year.

Royal London Asset Management economist Ian Kernohan said: “We expect CPI to rise further and move above target later in the year, as the impact of sterling devaluation takes time to feed through. This will squeeze real earnings growth to close to 0%, unless wages rise by more than we expect. We see no interest rate increase from the Bank of England this year or next.”

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