Inflation affects everyone, but those that are hardest hit are those on a fixed income – such as many pensioners.
Those who arranged their pensions a few years ago can find that the income that seemed adequate for a comfortable retirement then looks distinctly uncomfortable when inflation can cut its buying power by 10% in a year.
So, news that the state pension is set to go up can be very good news indeed.
How the state pension should increase
It’s all due to the triple lock.
The triple lock is a policy commitment by the government which raises the State Pension annually in line with the highest of three measures: average earnings, inflation as measured by the Consumer Prices Index, or 2.5%.
High inflation figures mean that the state pension is poised to soar by 8.5% next year to more than £11,500 under the triple lock.
The figure has not been confirmed, but economists do not think inflation will exceed 8.5% when the data for September, used to calculate the triple lock, are released in October.
It should mean the state pension will increase to £221.20 per week, or £11,502.40 per year, following the inflation matching 10.1% last year to £203.85 a week, or £10,600 annually.
But it might not – and even if it does, it might not be enough.
There could be problems ahead
There are actually two worries behind the good news.
The first is that even with an increase, pensioner will still be feeling the pinch from inflation which is still nowhere near under control, let alone near the 2% target set by the government.
The second is that the triple lock might have to be broken.
The projected rise in the state pension comes amid concerns about rising costs, with the Institute for Fiscal Studies warning that it by between £5bn to £45bn a year by 2050, when people who are in their early 40s today are expected to reach retirement age if the triple lock is to stay.
This year, the state pension jumped 10.1%, the biggest rise on record and equivalent to a £6bn increase in spending, taking the total bill to £110bn. In the 2024/2025 financial year, these costs are expected to surge to £135bn, according to the Department for Work and Pensions. These costs are not sustainable– especially with the number and longevity of pensioners increasing.
Rishi Sunak has unpicked the triple lock before. The Government temporarily suspended the wages element of the pensions triple lock for 2022-23 when data was distorted by the Covid pandemic.
He has not yet confirmed the increase this year – and refused to commit to the triple lock if his party wins the next general election, saying he will not “speculate” on policy pledges.
It all means that even if next year might include a boost for pensioners, the long term outlook might not be so positive.
Don’t forget that the taxman is eyeing your pension. The number of people aged 65 and over who pay income tax rose by roughly 750,000 – from 7.73 million to 8.5 million – off the back of the last increase to the state pension.
Next year’s figures are likely to mean another 650,000 people dragged into paying pension income tax.
So what can you do?
A bigger state pension would be good, but it looks as though the need to have a personal private pension, and a sizable pension pot is greater than ever. At Continuum we can help you find the most effective pension strategy.
But what if you are already drawing your pension?
The obvious answer is that if you are already drawing your pension, it may be too late to do very much at all.
But that might not be true. At Continuum we can look at your finances in retirement, and we may be able to find ways to make drawdown more rewarding for you, or help you find other sources of wealth.
For the help you need to make your pension work harder, call us today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy, you should seek independent financial advice before embarking on any course of action.
The value of your drawdown pension fund/ investments can fall as well as rise and you may get back less than you invested. Income from them is not guaranteed.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits and may not be suitable for everyone. You should seek advice to understand your options at retirement.
Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. We recommend that the investor seeks professional advice on personal taxation matters.