Pension savers will be the key beneficiaries of today's five-year high inflation figures as the lifetime allowance, public sector pensions and the state pension all get more generous.
This morning (17 October) it was announced the consumer price index (CPI) rate had increased again to 3 per cent, up from 2.9 per cent in August. This is the highest rate since April 2012.
The news will be another blow to workers who according to official figures continue to suffer stagnant wages unlinked to inflation.
The latest data from the ONS showed real average weekly earnings fell by 0.4 per cent in the three months to July 2017, taking into account inflation, compared to the three months before the EU referendum, when earnings grew by 1.5 per cent.
However today's figures are a boon to pension savers who are set to reap the rewards of their benefits being linked to inflation.
The pensions lifetime allowance (LTA) will increase by £30,000 from April 2018 as a result.
This is because the government announced at Budget 2015 that it would reduce the lifetime allowance for pension savings from £1.25m to £1m from April 2016, but that from 2018-2019, the allowance will be increased by inflation, the consumer prices index.
The LTA represents the maximum amount of money a saver can save in their pension pot with the benefit of tax relief at their marginal rate before incurring an additional tax charge of up to 55 per cent.
After rising steadily from £1.5m in 2006 to £1.8m in 2010, the LTA has been subsequently reduced in stages to £1m over the last seven years.
With the new inflation figures, it is now set the the LTA increase to £1.03m next year.
For Rachel Vahey, product technical manager at Nucleus, this rise “seems to go against the recent direction of travel”.
In a previous interview, Ms Vahey said that there are regular predictions among the industry that the lifetime allowance will go down from £1m.
However, in July the HM Treasury confirmed its decision to press ahead with an increase in the LTA, in line with inflation.
For Kate Smith, head of pensions at Aegon, it is welcome that the base-level of the LTA “is set to start growing again, even if on the surface the numbers aren’t large”.
She said: “Despite being small, this is a complex area, so those affected should seek financial advice to make sure their pension is protected from additional tax charges.”
According to Nathan Long, senior pension analyst at Hargreaves Lansdown, even a small increase “is welcome news for pension investors with larger pots”.
He said: “However we continue to see this limit as a penalty for those who have invested wisely.
“With an annual contribution limit of £40,000 or lower for some higher earners, the LTA serves little purpose and should be done away with altogether.”
Today’s figures will also have an impact on the state pension, since the triple lock dictates it will increase in April 2018 by a rate equal to September 2017’s CPI, earnings growth or 2.5 per cent, whichever is the greatest.
Given today’s CPI figure, next year’s state pension increase is likely to be £164.33 a week (£8,545.50 a year), said Hargreaves Lansdown.
Mr Long said: “Not only is the increase important for those who are receiving their pension, it also helps those on the run in to retirement to plan with increasing accuracy.
“If you are in your 50s you can reasonably start thinking about what you might spend in retirement.
“Ideally you should have enough secure income from your state pension, any final salary pensions or an annuity to cover the non-essential spending. It is never too late to squirrel monies away for life after work but the first step is to plan.”
Public sector pensions for next year are also linked to the September inflation rate.
Since 2015, these schemes have moved to using career average earnings as opposed to final salary pensions.
This basically means that each year members ‘bank’ their accrued pension and this is uprated in-line with the previous September’s inflation.
According to Hargreaves Lansdown, some pensions increase this cumulative accrued benefit by more than inflation, such as the Teachers’ Pension (CPI + 1.6 per cent), NHS Pension (CPI + 1.5 per cent), and the Police Pension (CPI + 1.25 per cent).
So, with inflation of 3 per cent, 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.
Tom McPhail, head of policy at Hargreaves Lansdown, said: “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.”
maria.espadinha@ft.com
