The State pension will rise by 3% next April, but it’s not all strictly good news.
The BBC website, covering the announcement that the CPI inflation rate had risen to 3%, had a picture of pensioners ‘dancing for joy’ on the premise that September’s 3% inflation figure was the one that would be used to fix state pension increases from April 2018.
The image was understandable but a tad simplistic.
In reality, pensioners will be no better off because the increase in pension income is, in theory, matched by increased prices. In practice what you will see is that pensioners may be marginally better or worse off and this will depend on how their personal spending patterns compare with the ‘shopping basket’ which is used to calculate CPI. To illustrate that point, the twelve components of that (CPI) index showed annual inflation ranging from 4.3% for alcoholic drinks and tobacco down to only 1.4% for miscellaneous goods and services.
What about private pensions?
State pensions have inflation linking but this ‘protection’ is by no means certain among private pensions. Most large occupational final salary (defined benefit) schemes offer inflation-proofing to their pensioners, albeit outside the public sector, scheme increases may be capped.
Ryan says “In the past, many people at the stage of drawing benefits from personal pensions – and other similar types of pension arrangement – have chosen to buy an annuity with no inflation protection. Whilst the starting level of annuity income may have been much higher, the ‘real value’ has been steadily eroded by inflation. As an example of this, £1 in September 2007 now has a buying power of 78.7p, based on CPI inflation.”
Have your retirement plans allowed for retirement inflation?
In today’s annuity market, an inflation-linked annuity for a 65-year old costs about 60% more than its non-increasing /level counterpart. You may well choose not to buy any form of annuity at retirement, but the costs of providing enough to be ‘dancing for joy’ will still be substantial.
Whether you are planning for retirement or you are ‘at retirement’ and considering your options, make sure you talk to our experienced, well qualified advisers – get in touch
Please Note: Occupational pensions are regulated by The Pensions Regulator. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.