Low inflation to help increase pensions

Low inflation to help increase pensions

Next April’s auto-enrolment contribution hike could be mitigated by inflation, which hit its lowest level for two years in January, Kate Smith has said.

The head of pensions at Aegon said if wage growth continues to outstrip inflation, as it has done in recent months, it could "help to absorb some of the costs and mitigate budgeting concerns as minimum contributions for auto-enrolment rise from 5 to 8 per cent".

This will be the biggest increase in pension contributions since the government introduced auto-enrolment in 2012.

According to data released by the Office for National Statistics (ONS) today (February 13), UK inflation was 1.8 per cent in January, down from 2.1 per cent in December.

This was the third month in a row of inflation decreases, bringing the 12-month rate below the Bank of England’s target of 2 per cent.

Ms Smith said: "With the latest wage growth figures showing a positive trend, the gap between earnings and inflation continues to widen and households will feel an ease in the cost of living.

"In the period of real wage growth, individuals should find themselves in a strong financial position to set out financial goals and those who can afford to save any additional income should be encouraged to do so."

Nathan Long, senior analyst at Hargreaves Lansdown, agrees with Ms Smith.

He said: "The timing of the fall in inflation could hardly be better ahead of the all-important hike in pension contributions hitting workers in April.

"Auto-enrolment has been a resounding success, but the government will be keen to ensure they don’t fall at the final hurdle so will welcome today’s news."

Looking ahead, the inflation picture is expected to be heavily influenced by the deal the UK leaves the EU with in March.

But Ben Brettell, senior economist at Hargreaves Lansdown, said the central bank would look to mitigate any heavy impact.

He said today’s numbers were not going to change the Bank of England’s thinking about the economy or interest rates.

He said: "Assuming some kind of smooth Brexit, it should be able to gently nudge rates up over the next couple of years.

"Of course if we get a cliff-edge, no deal Brexit, all bets are off – a drop in sterling would likely see a sharp rise in imported inflation, but I’d expect the Bank to look through this and cut rates to support the economy."