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Mixed news for pensions thanks to inflation

Mixed news for pensions thanks to inflation

Category: Pensions
Author: Lieke Braadbaart
Date: 26/10/2017

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Given all the news on inflation we've been inundated with, you'll be aware of the effects on your everyday expenses and savings. However, did you know it will also affect pensions – and not necessarily in a bad way?

State Pension increase on the cards

The Government's current 'triple lock' rules dictate that, each year, the State Pension increases by a rate that is equal to last year's measure of consumer inflation – CPI – as calculated in September, average earnings growth or 2.5%, whichever is higher. Therefore, with official word that CPI hit 3% in September, the new State Pension is set to increase to £164.33 per week in April 2018 and the old State Pension will rise to £125.97 per week.

For the new State Pension, this translates to £8,545.50 a year that those aged 65 and up will be able to enjoy, a rise from the £8,296.60 per year that is currently on offer, while for those on the maximum old State Pension, annual payments will equate to £6,550.44, up from £6,359.60 at present. However, even with this increase, most people will not be able to live on just the State Pension, especially if people's spending power continues to be eroded by inflation at the same time.

That's why it's so important to have some sort of private pension, whether through your employer or arranged on your own. If you're already retired and worried about the increasing cost of living, you could consider downsizing to take advantage of the strength of the housing market, or even releasing equity from your home.

Public sector pensions also on the up

Another pensions vehicle whose increases are calculated based on September's inflation figure are the public sector pensions, with the teachers' pension set to increase by CPI + 1.6%, NHS pensions by CPI + 1.5% and police pensions by CPI + 1.25%, so expect rises of 4.6%, 4.5% and 4.25% respectively.

Nathan Long, senior Pension analyst at Hargreaves Lansdown, commented that "pension schemes of public sector workers continue to leave most members well placed for retirement. However, this is a fine balance as members of some public sector schemes may actually find their future pensions increasing nicely whilst they struggle to pay for the here and now."

And even 'regular' pensions may benefit

Lastly, the high level of inflation means that the Lifetime Allowance, which limits the amount that can be paid out of a pension scheme before triggering tax, is due to increase. It currently sits at £1 million, but will go up to £1.03 million due to CPI – great news for those with substantial pension pots.

However, Prudential has warned that the greater retirement incomes that may be needed to deal with the increasing costs of goods and services could mean that people run out of money faster than anticipated, so it isn't all good news.

What can I do?

For those currently in retirement and looking at the news with dread, consider the benefit of your upcoming State Pension income rise, and calculate if that will be enough. If not, downsizing and equity release are popular ways of increasing your income in retirement.

If you're still in work, it may be hard to even consider setting extra money aside for later life given the increasing cost of living. Consider starting small and putting some money aside in an easy access account so you'll have at least something to fall back on should inflation really start to bite. And if you haven't been auto-enrolled yet, look into getting a workplace pension to benefit from contributions from your employer and tax relief as well as your own savings.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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