Pension savers big winners from inflation spike

Pension savers big winners from inflation spike

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.