Inflation – Is your pension income protected?

Alan Ferguson

Private Client Adviser
Essex

Soaring inflation affects us all. So how do rising prices affect people with different types of pension, as well as everyone facing a cost of living crisis?

The initial starting point would be to consider your finances, plan and budget accordingly, consider what your essential and non-essential expenditure looks like, can you make any changes to these areas? You will also be aware that the government has recently announced their support for the cost of living crisis which will provide some support to all households

We now look at your pension.

If you have a drawdown pension policy?
Think carefully about how you respond to the rising prices. You might consider taking more income from your drawdown pot to maintain your standard of living, but how much will this affect how long your pot will last, will these increased payments mean that your pot ‘runs out’ too early?

Do think carefully before increasing the amount that you are drawing from your pension pot. It’s essential that you speak to your adviser at Origen to ensure you understand the implications on your retirement savings.

The basic and new State Pensions?
The basic State Pension and the new State Pension are again thankfully subject to the triple-lock guarantee, meaning they increase by the highest of average earnings, inflation or 2.5%. However, this is only in respect of the basic and new State Pension, any additional State Pension will increase with the Consumer Price Index (CPI) only.

Currently the old (Pre April 2016) basic State Pension is worth £141.85 per week (£7,376.20 per year), while the new State Pension pays £185.15 per week (£9,627.80 per year).

If you have not yet received your State Pension, your adviser can guide you on how to review your National Insurance record to ensure you are fully up to date.

If you have a lifetime pension annuity?
Annuities lock in a retirement income for life. The impact of high inflation on your annuity will depend on the type of annuity you have. You may have some inflation protection or escalation within the terms of your contract. If inflation exceeds the escalating factor included within your annuity then your income will be falling in real terms. If you have a level, otherwise known as a fixed annuity, then your income will be falling in real terms. Current market trends are showing rising annuity rates, which for clients concerned about now needing an income is a positive. You should speak with Origen about how you can manage your income requirements.

Do you have a public sector defined benefit pension?
Defined benefit pensions provide a guaranteed income for life similar to annuities, except this time the promise is underwritten by the employer. In the case of public sector pensions, that employer is the State, meaning pensions are essentially underwritten by taxpayers. If you have a public sector defined benefit pension then your pension income will increase in line with Consumer Price Index (CPI)

Or a private sector defined benefit pension?
How inflation impacts your private sector defined benefit pension will depend on the rules underpinning the scheme. Some schemes still use the Retail Price Index (RPI) as the measure of inflation against which to uprate pension payments, which was 12.3% as of July. However, often these rules place a cap on inflation protection, commonly set at 5%, which means that some pensioners with final salary pensions could see surging living costs outpace rises in their pension incomes. Again, if you find your pension income going less far you should speak with us about what else you can do to generate additional income.

If you’re a Pension Protection Fund member?
If your private pension is paid by the Pension Protection Fund (PPF), the inflation protection you might receive from the PPF will vary depending on the period of time during which you built up the benefits. Generally, payments relating to pensionable service from 6 April 1997 onward will rise in line with inflation, though subject to a cap of 2.5% a year. However, benefits accrued in respect of service prior to 6th April 1997 do not receive any increases.

At current inflation rates PPF members will experience significant real terms cuts in their benefits. What else can you do to offset this erosion of your retirement income? Whilst there are limited options available for a scheme that is in in the PPF, we can help you to review the impact and provide advice on your wider retirement plans.

A freeze on the pension lifetime allowance and personal Income Tax allowances
The lifetime allowance is the maximum amount you can have in your pension before incurring a tax charge. It was supposed to rise in line with consumer price inflation but the Government cancelled these increases until the 2025/26 tax year. The allowance is now frozen at £1,073,100 and will remain so for the rest of this Parliament. Many more people could therefore face a tax charge when they take their pension benefits.

Also, due to the freezing of the personal Income Tax allowance until the 2025/26 tax year, you may pay more Income Tax on any increases you do receive in your retirement income. These increases may therefore be less than you imagine them to be.

We welcome the recent government announcements to support our clients during the current cost of living crisis and high inflation. We are here to discuss the impact of these developments on your own personal situation or to review your financial plans. Please speak to your Origen adviser, or contact our Origen Client Services Team on 0344 209 3925. You can also contact us by e-mail at clientservices@origenfs.co.uk
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[ Date Posted: 27/09/2022 15:11:38 ]

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