With inflation at a 40-year high, some retirees could see similar hikes to their pension payments in 2023, with some retired public sector workers' payments set to increase by nearly 12%.
The Office for National Statistics (ONS) confirmed last week that September’s Consumer Prices Index (CPI) measure of inflation was 10.1%, up from 9.9% in August. This inflation figure is important, as it's the one that's used in the state pension triple lock, and to calculate other pension payments where increases are directly linked to it.
While this is good news for those whose pensions are set to increase by 10.1% or more, other pension types will be much more vulnerable to price rises, due to caps on how much they can increase by.
Here, Which? explains how much you can expect your pension to rise by from April 2023.
How does inflation impact pensions?
CPI inflation measures the change in the prices of a basket of around 700 popular goods and services typically bought by households.
The figure, which is provided by the ONS each month, shows how much prices have changed compared with the same month of the previous year.
For example, if you'd bought all the same items in the basket in September 2021 and bought them all again the same month in 2022, you could expect your shop this year to be 10.1% more expensive.
High inflation will therefore erode the real value of your pension income if your pension doesn't keep up with it - put simply, you won't be able to buy as much.
We’ve summed up what rising prices mean for people with different types of pension.
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Public sector pensions
A public sector pension is a workplace pension for public sector employees, such as teachers, NHS workers and civil servants.
Many of these are defined benefit pensions, which means the amount they’re worth on retirement is based on your final salary and the length of your employment, rather than the amount you’ve paid into your pension.
Since April 2011, the CPI has been used to calculate the statutory minimum increases of public sector pension benefits. But the amount they increase by depends on the scheme, as some active members still get annual increases above September’s CPI.
Scheme regulations stipulate that teachers receive an increase of CPI plus 1.6%, NHS workers get CPI plus 1.5%, and the police receive CPI plus 1.25%. These enhanced rates don’t apply to those who’ve stopped paying into the scheme or are already receiving payments.
Judicial, local government and civil service pensions get an increase in line with CPI.
- Find out more: public sector pensions explained
Private sector pensions
A defined benefit pension scheme – sometimes called a final salary or career average pension scheme – is one that promises to pay out an income based on how much you earn when you retire.
Unlike defined contribution (DC) pensions, the amount you’ll get at retirement is guaranteed, and it will be paid directly to you.
There are two types of defined benefit pension:
- final salary schemes, which are based on how much you're paid when you finally retire
- career average schemes, which are based on an average of your salary across your career.
Both types of pension provide valuable benefits, the biggest of which is something called 'index linking'.
This means that your pension income is guaranteed to rise each year so it can keep up with rising prices in the future. This protection is usually capped at 2.5% or 5% a year, although in some cases it's linked to the Retail Prices Index measure of inflation, which tends to be even higher than CPI.
If you have this type of pension, it’s worth checking its rules to see whether annual rises are capped, or contact the scheme directly.
- Find out more: defined benefit pensions explained
Annuities
An annuity is an insurance product that allows you to swap your pension savings for a guaranteed regular income that will last for the rest of your life - but how much you get is determined by the rate your provider offers.
If you're considering buying an annuity, you’ll have to weigh up whether you want protection against inflation, and bear in mind that payment rises will often be capped.
Escalating annuities pay out an increasing amount each year. You can opt for a specific percentage increase each year, or by inflation - which will usually be pegged to RPI. However, these can be expensive.
According to AJ Bell, in the 2020-21 tax year, around 85% of the 60,000 annuities purchased were ‘level only’, meaning they had no inflation protection at all. Just 15% were ‘escalating’, meaning many people's payments will be affected by the current high levels of inflation.
- Find out more: annuities explained
Pension Protection Fund
The Pension Protection Fund (PPF) protects people with a defined benefit pension in the event that their employer becomes insolvent. If the employer doesn’t have enough funds to pay you the pension they promised, the PPF will provide compensation.
In most cases, payments relating to pensionable service from 6 April 1997 onwards will rise in line with inflation, but this is capped at 2.5%.
Payments relating to pensionable service before that date, including any applicable Guaranteed Minimum Pension benefits, won’t increase.
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State pension
The state pension could be worth more than £10,000 for the first time ever next year, but only if the triple lock remains in place. While past Prime Minister Liz Truss committed to maintaining it in 2023, we are yet to see what current Prime Minister Rishi Sunak will do. We will hopefully find out when the Autumn Statement is announced on 17 November.
Payments are usually protected by the triple lock, which means they will increase by either September’s rate of CPI inflation (10.1%), average earnings growth as of July (5.5%) or 2.5% - whichever is higher.
This means pensioners who are entitled to the full new single-tier state pension will get £203.85 a week from April 2023, up from £185.15 this year. This change means that pensioners will be £972.40 better off by the end of the 2023-24 tax year, taking their total income to £10,600.20.
But remember that what you get depends on your National Insurance record, so your payments could be lower.
Pensioners who reached state pension age before April 2016 and receive the basic state pension will see their weekly payments rise from £141.85 to £156.20. This amounts to a £746.20 pay rise in 2023-24, with income rising to £8,122.40 for the year.
- Find out more: how much state pension will you get?
source https://www.which.co.uk/news/article/pension-payments-which-pensions-will-rise-with-inflation-in-2023-axSh08x2LLR0