Pensioners are paying £3bn price for surging inflation

Pensioner spending power will be slashed by almost 3 billion over the next year as rising prices continue to wreak havoc with fixed incomes, a report warns today.

In the latest stark research highlighting the damage inflicted by rising living costs on pensioner finances, insurer Prudential claims that retirees with their money in cash savings will lose an average of nearly 300 to inflation over the next year.

It was revealed yesterday that the consumer prices index (CPI) measure of inflation rebounded last month from 4.2 to 4.4 per cent. The retail prices index (RPI) measure was unchanged at 5 per cent.

But pensioner living costs are rising at a rate 44 per cent faster than the headline rate of inflation, according to research by insurer Prudential. The average pensioner has an average of 19,664 in cash, 278 of which will be wiped out in the next 12 months due to inflation and low interest rates, based on average cash balances and savings returns.

Pensioners reliant on cash savings and regular income from a fixed annuity are being hit hardest by inflation. However, pensioners also spend a greater proportion of their money on goods and services with the fastest rising prices, such as food and energy.

The cost of staple goods such as bread, cooking oil and tea all rose at a faster rate than the cost of clothing, footwear and white goods, on which younger age groups spend more.

The prospects of inflation easing dimmed again yesterday as Npower became the latest energy supplier to hike its domestic prices. It was the fifth of the big six to unveil an increase, which will come into force on 1 October when its gas and electricity prices go up by 15.7 per cent and 7.2 per cent respectively.

Vince Smith Hughes, head of business development at Prudential, said: "As most people in Britain feel the financial pressure of rising living costs, pensioners on fixed retirement incomes are facing even higher levels of inflation and are suffering disproportionately.

"We strongly encourage people to speak to a financial adviser to ensure they are making the best use of income-generating investments, bonds and pension funds where relevant, in order to ensure their income has the potential to rise and combat increasing inflation and living costs."

The Pru's report comes days after Age UK Enterprises estimated that, since 2008, people in their sixties have seen living costs rise by more than 1,000 on top of the increase borne by the population as a whole.

And Saga claimed yesterday that pensioners have seen almost a fifth of their spending power wiped out since the credit crunch started. Research by the over-50s group found that inflation facing older people has soared by almost 20 per cent cumulatively since 2007, compared with 13.9 per cent for the rest of the population.Dr Ros Altmann, director general of Saga, warned that people on fixed incomes "will really be in trouble".

"The Saga price indices reveal that older people in their fifties are worse hit by rising inflation than the rest of the country. They are supporting a huge burden, many with elderly relatives to support as well as their children and grandchildren," she said.

"And it is utterly shocking that elderly people have had to suffer inflation increases of over 18 per cent in the past few years - these are people who are living off their savings with are eroding at a rapid rate."