Retirees warned 'challenging times ahead' as inflation hits 2.2% - what it means for your pensions and investments

Analysts had previously forecast inflation coming in at around 2.3 per cent for last month.

This comes shortly after the Bank of England's Monetary Policy Committee voted to slash the base rate from its 16-year high of 5.25 per cent after its two per cent inflation target was reached.

The current level of inflation is higher than expected, and as a result traders are now pushing back their forecast of interest rate cuts to later in the year.

The market now expects the Bank of England base rate to only fall to five per cent pc by the end of the year when previously it had been hoped it may drop to 4.75 per cent.

As inflation now sits above the bank's two per cent target, many may be wondering what it means for their pensions and savings.

Lily Megson, Policy Director at My Pension Expert, said: “A small uptick in inflation certainly isn’t great news after the long journey back to target levels, but it isn’t devastating either.

"Critically, it should serve as a reminder that we are not yet out of the woods. Until inflation stabilises, things will be challenging for Britain’s retirees and those planning their retirement – particularly following years of their savings facing a walloping from high inflation.

“So, what needs to be done? Frankly, the onus is on our new government to ensure that savers are given the help and support they need to make well-informed financial decisions, even in times of uncertainty.

"In practice, that looks like enabling access to financial advice, as well as education and guidance on savings and investments.”

The stock market is not officially linked to inflation or the base rate, but they both can have a big impact on investor sentiment.

Jason Hollands, managing director of Bestinvest by Evelyn Partners, said this morning’s inflation rate drop could be good news for investors.

He said: “The combination of easing inflation, the prospect of lower borrowing costs and an improving UK growth outlook should also prove supportive for UK equities, especially the more domestically focused small and medium sized names, which have been deeply unloved in recent times.

“This could be a good entry point for investors, as UK equity valuations remain very cheap compared to global equities, a point evidently not lost on the wave of bids for British companies by foreign acquirers and private equity funds we have seen recently.

“The UK stock market has certainly been confronted with many challenges including a dearth of IPOs and companies being lured to overseas exchanges, but better economic news, high levels of share buybacks and a wave of bids are creating lots of opportunities for investors.”

Even though inflation has fallen back massively from the double digit figures from previous years, it remains an important factor in people’s retirement planning.

They could be retired for twenty years or more and they need to do what they can to preserve its purchasing power.

Britons in the market for an annuity can get level annuities which offer higher starting incomes than their inflation linked counterparts. However, it should be noted that a product linked to prices will grow over time whereas a level one won’t.

The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,215 per year from a level single life annuity with a five-year guarantee. One linked to RPI on the other hand offers up to £4,541 as a starting income.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: "You need to consider the fact that inflation can move massively during the course of your retirement, and you may catch up in terms of income faster than you thought.

"Should high inflation return, the purchasing power of the level annuity income that once seemed so attractive could be severely stretched.

"Alternatively, if you don’t want to go down the inflation-linked route you can look at annuitising your pension in slices over time. This enables you to secure higher incomes while you age while allowing the rest of your pension to remain invested and grow.”