Concerns persist as inflation hits 40-year high

Industry experts have warned that the continued increase in inflation could leave retirees struggling to make their pension last, although many trustees are thought to be reviewing the way benefits are calculated to ensure savers don't miss out on “vital” retirement income.

The Office for National Statistics (ONS) confirmed today (17 August) that annual inflation hit 10.1 per cent in July, up from 9.4 per cent in June, with indicative analysis from the ONS suggesting this could be the highest CPI inflation rate since 1982.

Interactive Investor head of pensions and savings, Becky O’Connor, suggested the latest rise will “heap more despair on people trying to plan a decent retirement” and "dismay" those who recently retired thinking they would be able to manage, while those who chose to retire early during the pandemic may now be regretting that decision.

In light of this, O'Connor suggested that it "looks like ‘back to work’ will be the order of the day for older people who would like to enjoy retirement but can’t because of rises in the cost of living".

“We’ve already seen from ONS labour market figures earlier in the week that more people aged 65 or over are continuing to work or returning to work since the pandemic," she continued.

"Higher inflation could drive this trend and put retirement on pause for hundreds of thousands of would-be retirees or bring more of those who had perhaps prematurely thought they were in a good position to leave work back out of retirement."

O'Connor also warned that retirees may be "caught between a rock and a hard place", as a rise in the amount withdrawn from a pension from £5,000 a year to £5,500 a year to cover a 10 per cent rise in prices could mean a pension running out two years earlier, at age 83 rather than age 85.

“The pressure of making pension savings last is great at the best of times. During the worst of times, it becomes too much," she added.

However, trustees are taking action to help ensure that savers don’t miss out on “vital” retirement income, according to XPS Pensions Group.

Previous analysis from XPS Pension Group’s DB UK Funding Watch revealed that UK defined benefit (DB) long-term liabilities over the last three months have reduced by around £100bn as a result of falling long-term inflation expectations.

Despite this, XPS has pointed out that majority of increases to members’ benefits will be based on short-term inflation rates published later in 2022, which are expected to continue to be into double digits.

This, according to the firm, may mean that a DB member choosing to retire in early 2023 could see a material increase in their pension compared to retiring at the end of 2022 due to their benefit receiving an additional inflationary increase in 2023, which could represent £10,000 worth of extra pension, a 7 per cent difference.

However, XPS Pensions Group senior consultant, Charlotte Jones, suggested that "a lot of trustees" are already reviewing the way that members’ benefits are calculated to ensure that no one loses out on these high inflationary increases.

"For example, early retirement factors, which reduce a member’s pension on early retirement to allow for the pension being paid for longer, may not offer fair value to members in this current high inflationary environment," she explained.

"As a result, we’re seeing many trustees adjust retirement quotes temporarily to ensure that members don’t miss out on vital retirement income.

"We would recommend that all pension schemes take time to review the factors they have in place in the context of high inflation.”

Savers are not the only ones who may need to reconsider their plans though, as the latest increases in inflation have also prompted queries as to whether the government will push ahead with plans to reinstate the state pension triple lock.

Barnett Waddingham self-invested pensions technical specialist, James Jones-Tinsley, for instance, highlighted today’s inflation rate as suggestion that the new Prime Minster will "find themselves walking a pensions tightrope come September".

He explained: "Under the current double lock, state pension increases of the past year have been just a third of CPI, making it a struggle to maintain their standards of living.

"But reinstating the state pension triple lock will make life better in the short term at least. The two-month countdown has now begun for September’s CPI figure to be released in October, which will tell us whether we could be looking at a double-digit increase come April 2023, once a decision is made on state pensions.

“But, such measures could stoke inflation further and run counter to promises of increased fiscal responsibility across the economy.

"This could be a bitter pill to swallow for the next Prime Minister, especially after torpedoing inflation busting pay rises for public sector workers on the same grounds.”

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