Concerns raised over impact of inflation rise on pension contributions

Industry experts have raised concerns over the impact of rising inflation on savers’ abilities and willingness to contribute to their pensions, and on long-term saving in general.

UK inflation hit 7 per cent in March, continuing its upwards trajectory across 2022.

AJ Bell stated that the cost-of-living crisis will “inevitably” lead to savers being tempted to reduce or cancel pension contributions, which could cause “severe damage” to retirement plans.

It noted that the the challenges for those receiving an income in retirement will vary, with drawdown savers having to consider the sustainability of withdrawals, while annuity customers likely to face a “living standards squeeze” as they do not have inflation protection.

AJ Bell head of retirement policy, Tom Selby, said: “Whether you’re saving for the future, approaching retirement or already taking an income from your pension, the impact of the cost-of-living crisis is likely to be felt in various ways.

“The extent of this impact will depend on a range of factors including your income, spending patterns and how long spiralling prices persist.

“A short, sharp bout of inflation would be extremely painful for many, but the real fear is that the cost-of-living will keep rising over a prolonged period.

“People in different stages of their retirement savings journey will also face different challenges in this environment, from maintaining a long-term savings plan when you’re younger to making a pension income stretch further.”

Interactive Investor head of pensions and savings, Becky O’Connor, warned that saving for the long term had been reduced to a “pipe dream” for many.

A recent poll from Interactive Investor found that one in five people had stopped contributing to long-term savings and investments to cope with the increase cost of living.

“Expect the proportion abandoning future financial security to deal with the difficult present to rise further,” O’Connor added.

“Our data has also indicated a rise in the amount that retirees are withdrawing from their pensions, compared to the pre-pandemic average, leaving older people at greater risk of running out of money in retirement.”

Concerns were also raised following XPS Pensions’ DB:UK Funding Watch analysis that found that the 0.5 per cent increase in long-term inflation expectations since July 2021 had added £140bn to UK DB scheme liabilities and, while showing that most DB workplace pensions have some inflation protection in place, annual increases tend to be capped at 5 per cent or lower.

In addition, the UK state pension is set to increase 3.1 per cent in April, less than half of the 7 per cent increase to inflation and under the 8 per cent that pensioners would have received under the recently suspended triple lock commitment.

XPS Pensions Group actuarial consultant, Tom Birkin, commented: “The latest record high CPI announcement from the ONS this morning will hit the pockets of UK pensioners hard.

“As energy prices keep soaring and the cost-of-living increases, UK pensioners will continue to be squeezed even further.

“So, even though there is some degree of protection for UK pensioners, it will have a limited impact in a high inflation environment that is only expected to get worse before it gets better.”

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