Today’s decade-high inflation figure will have a significant impact on those in retirement and taking benefits from their pension, according to leading commentators.
Figures published by the Office of National Statistic show the consumer price index (CPI) running at 5.1 per cent, the highest it has been for 10 years, and only just short of the 20 year high of 5.2 per cent.
Pension experts have point out that is significantly higher than the proposed 3.2 per cent raise to the state pension, due next April. This is based on September’s inflation figures after the triple lock was amended to remove the earnings-link, which would have given pensioners a much larger increase.
In his recent Budget the Chancellor Rishi Sunak suggested that inflation might peak at 5 per cent next year. But this figure suggests prices are rising faster than forecast.
Aegon pensions director Steven Cameron says higher-than expected inflation is particularly damaging for those with large cash savings. This includes those who have cashed in pension funds and have kept the balance in cash. He points out that these savers are now being hit with a “double whammy” of low interest rates and high inflation which means the value of their savings are falling in real terms.
Cameron says: “Inflation has risen sharply in recent months. This will add to already heightened concerns regarding loss of purchasing power from cash savings and fixed incomes.”
LCP partner and former pensions minister Steve Webb says this may put pressure on the government to re-think the modest increase planned to the state pension in April.
He points out that those wholly dependent on state pensions and benefits will see their incomes rise by 3.1 per cent, but the prices they pay have risen by at least 5.1 per cent, and probably more by next April. This means a real cut in living standards of 2 per cent — even for the poorest pensioners;
Those in receipt of company pensions or private pensions may face a bigger squeeze. Webb points out that not all company pension payments are fully protected against inflation, and anyone who bought a ‘level’ annuity gets no annual increase at all.
Webb adds: “Unless the government re-thinks the 3.1 per cent state pension increase, 12 million pensioners could face a significant squeeze on their living standards next year.
“Not only will state pension payments fall in real terms, but income from private pensions will be squeezed, and inflation will eat away at the value of savings held by pensioners in cash Isas and bank accounts.
“The government has shown that it can change universal credit rates at short notice when it wants to, and it will now come under pressure to re-think the modest state pension increase it had planned for April 2022”.
Aegon points out that £1,000 put in a bank account last year, earning average interest at 0.19 per cent would be worth £953 today, once inflation had been taken into account. In contrast £1,000 invested invested it in the stock market, it would have grown to £1,097— which after inflation is still worth £1,044 today.