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According to a report published by Ernst & Young for financial services firm MetLife, just two per cent annual inflation reduces spending power by 40 per cent over 25 years.

If inflation hits five per cent over the same period, spending power is cut by 70 per cent.

But the report also predicts that the twin challenges of increased longevity and long-term economic factors will mean big opportunities for providers and advisers if the financial services industry grasps the opportunities to provide new solutions.

The report for MetLife highlights issues with current retirement products, predicting that current low rates for traditional annuities are unlikely to improve substantially in the foreseeable future. It also notes that many drawdown products offer no protection against investments falling.

It predicts that demand is likely to increase for retirement solutions which can offer: guarantees to some extent; provide flexibility for differing needs at stages of retirement; allow customers to keep investing for the long-term and provide access to wide range of property, equity and bond-linked funds.

A spokesman for Ernst & Young said: "Changing attitudes to retirement create substantial opportunities for providers and advisers but at the same time create threats. With high expectations of retirement there is a clear risk of disappointment should retirees’ pension provision prove inadequate."

According to Dominic Grinstead, strategic development and marketing director at MetLife, more innovative is needed in the retirement planning market.

"MetLife believes that products such as unit linked guarantees offering guarantees can play an important part in the changing retirement market."

The report also said that someone earning £35,000 a year will need a pension fund of around £300,000 in order to guarantee an income of £20,000 on retirement.

Last week, it was revealed that thousands of women could lose out on £1bn of pensions due to problems with the governments’ Home Responsibilities Protection (HRP) scheme. See story here.