Millions of pensioners will feel the squeeze as bills rise sharply and the cost of living rockets, but they should not turn to their pension to increase their income. 

Rising inflation can wipe years of retirement income off pension pots as savers must increase the amount they withdraw to maintain the same spending power each year. 

Households are bracing for the worst cost of living crisis in decades, after inflation hit a thirty-year high of 5.4pc last month. The Bank of England’s monetary policy committee has warned it expected inflation to peak at 7.25pc in April, reflecting the enormous rise in the energy price cap.

Pensioners will be particularly vulnerable, as they tend to pay higher energy bills and the state pension is set to lose value.

Nine million people, nearly half of over-65s, said they would have to heat their homes less, according to Age UK, the charity. Two in five pensioners said they would consider taking on debt to manage the rising cost of living. 

Beware of increasing your income

Many may turn to their pensions to make up the shortfall but this could be a mistake, according to Lee Clark of wealth manager Brewin Dolphin. 

“We advise against increasing the amount of regular withdrawals, especially if they are taking more than they need and if their funds will be sitting in cash accounts,” he said. 

Before dipping into the pension, it is important to use up other income streams, such as the state pension, any final salary pension money or current cash reserves, he said. 

The biggest danger is withdrawing too much and leaving it in cash where its value will be quickly eaten away, he said. 

One option for those who want to fully protect their pension against inflation is to buy an inflation-linked annuity, which would provide a stable income stream that keeps pace each year. However, these types of annuities have been widely unpopular in recent years because their starting income is much lower than that of a level annuity. 

Someone with a £100,000 pension who needs an income of £5,000 a year on top of their state pension would run out of money after 37 years if there was zero inflation and their invested cash grew by 4pc net of charges. That is according to calculations from AJ Bell, the fund shop.

However, the same pension would run out of money 19 years sooner if inflation remained at its current level of 5pc because the retiree would have had to increase the amount they withdrew by 5pc every year to maintain their spending power.