September inflation’s triple impact on pensions

State pension will increase by at least £4.78 a week, the Lifetime Allowance will increase by £30,000 and public sector pensions will be upgraded by up to 4.6 per cent, following today’s September CPI inflation figures of 3 per cent.

The increase, up from 2.9 per cent in August, has sparked predictions of a 0.25 per cent increase in the Bank of England base rate in November, although the £825 increase in the cost of living of the average family has also raised concerns at the possibility of a consumer slowdown.

The ONS’s September CPI inflation figures will increase the Lifetime Allowance for the first time, rising to £1,030,000. Those above the current Lifetime Allowance of £1,000,000 without Lifetime Allowance protection, will see their Lifetime Allowance Excess tax charge fall by up to £16,500. The increase could also increase their tax-free cash by £7,500.

Full State Pension will increase from the present level of £159.55 per week, equivalent to £8,296.60 per year to £164.33 a week, or £8,545.50 a year.

The September inflation figures are also used to calculate public sector pension increases. Since 2015 Public Sector Pensions have moved to using Career Average Earnings as opposed to final salary pensions. Some pensions increase this cumulative accrued benefit by more than inflation. Benefits in the Teachers’ Pension increase at CPI + 1.6 per cent, while the NHS Pension increases at CPI + 1.5 per cent, and the Police Pension at CPI + 1.25 per cent.
This means the increase for pensions being accrued will be 4.6 per cent on the Teachers’ Pension, 4.5 per cent for those in the NHS and 4.25 per cent for the Police Pension Scheme.

Retirement Advantage pensions technical director Andrew Tully says: “The latest inflation news really is a double-edged sword. On the one hand key state benefits including the State Pension will increase by at least 3 per cent due to the triple lock. Public sector pensions in payment will also increase.

“People saving hard for retirement now have an opportunity to save a little more as the lifetime allowance, basically the overall limit on the value of your pensions before you get hit by an extra tax charge, will also increase by £30,000. This doesn’t sound like a big incentive but anything that helps people who are doing the right thing but are being hit by this arbitrary limit is welcome.

“The sting in the tail though for anyone trying to make ends meet is the seemingly never ending rise in the cost of living. With households needing to find an extra £825 a year to maintain their standing of living.”

Aegon head of pensions Kate Smith says: “Today’s figures mean that weekly state pension payouts will rise from £ 159.55 to £164.37. This means that people will see their annual State pension income rise by £250. However, those on the old Basic State Pension will only see their State pension increase from £122.30 to £125.97 a week, giving an annual increase of only £191.”

Hargreaves Lansdown head of policy Tom McPhail says: “Inflation can often be bad news for pensioners and pension savers as it can erode their savings, but today’s CPI number will produce a relatively generous increase to both private pension savings and to the state pension. Our only hope now is that the Chancellor doesn’t look on this as an excuse to raid pensions taxation again in next month’s budget.

NIESR head of UK macroeconomic forecasting Amit Kara says:” Today’s inflation data together with high employment levels and our view that economic growth is nudging higher in the second half reinforces our judgment that the Bank of England will reverse the 25 basis point reduction in Bank Rate announced in August last year at its November meeting.

“Additional rate increases might be necessary to ensure that the economy does not overheat as we begin to incorporate the negative impact of Brexit on productivity growth.”

Portfolio Management Group senior economist Leila Butt says: “The continued rise in inflation makes it more likely that the Bank of England will hike rates by 25bps at its November meeting, despite the fact that forward looking indicators are signalling a further slowdown in economic growth. But any rate hikes in the short term will probably be limited in scope. Our view would change regarding a November hike if forward looking indicators – survey and official data – weaken further in the run-up to the November meeting, or political risks, particularly around Brexit, rise.”

Royal London Asset Management economist Ian Kernohan says: “CPI inflation rose to 3.0 per cent in September, on the cusp of letter writing territory.  While this is higher than expected in the August Inflation Report, the Bank of England’s MPC did signal in the last set of minutes that CPI would rise to 3 per cent by October, so this won’t have come as a surprise to them.

“We expect the MPC to raise interest rates at the next meeting in November.  Inflation should fall back next year, as the effect of sterling devaluation begins to ease.”