State pension hike comes into force but savers set to feel the squeeze of inflation
State pension payments have been hiked 3.1 per cent from today but savers are set to feel the squeeze as inflation outpaces the rise in payouts.
The rise today will see the the basic state pension increase by £4.25 a week to £141.85 per week, while the flat-rate state pension (paid to those who reach state pension age from 6 April 2016) increases by £5.55 a week, from £179.60 per week to £185.15 per week
Pensions have been hiked in line with September’s inflation print of 3.1 per cent, but the Consumer Price Index has doubled since then to 6.2 per cent in February 2022, with economists predicting it to continue to run rampant this year.
Analysts have warned the rise will feel like a cut for millions of retirees.
“When is a pay rise not really a pay rise? When the cost of the things you buy are increasing by more than the extra cash you’re receiving,” said Tom Selby, head of retirement policy at AJ Bell.
“Sadly, that is exactly the position millions of retirees find themselves in today as the state pension rises by 3.1% – exactly half the 6.2% CPI inflation figure recorded in February this year.
The hole in pensioners’ spending power has been left partly as a result of government’s decision to axe the earnings element of the triple-lock guarantee, Selby said, which Chancellor Rishi Sunak deemed too costly.
Raj Mody, global head of pensions at PwC told City A.M. that the worst will be yet to come for pensioners.
“One of the challenges pensioners will have is that if they rely on the state pension as a big part of their total income, and that increases only in line with historic inflation, then they’ll really feel the pinch when their bills go up now with current inflation, or even faster than inflation,” he said.
“There’s a lag effect which doesn’t matter in times of stable and low inflation but can hurt in times of high and unpredictable inflation.”
It comes as Mody warned last month that several top FTSE 100 firms are mulling unprecedented discretionary pension hikes for private sector pension schemes in order to not leave pensioners out of pocket.
Analysts at investment firm Interactive Investor said pensioners may be left struggling to pay bills this year as inflation continues to surge.
“Today’s increase in state pension amounts is dwarfed by inflation, which for pensioners may be even worse than the headline figures suggest, because the current inflation rate does not reflect the much higher personal inflation rate that many pensioners, who spend a high proportion of their income on energy and food, will face,” said Becky O’Connor, head of pensions and savings.
O’Connor warned that pensioners may end up falling behind on bills but it was a “a case of having to get through the next few months”.
“Hopefully, next year’s state pension amounts will rise more generously thanks to the reinstatement of the triple lock, which will use earnings and inflation data from this September to determine the rise in levels of state pension for 2023,” she said.