Do you think your pension is resistant to inflation? Prepare for shock

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Millions of retirees who believe their incomes are protected from inflation could wake up rudely in the coming months

Millions of retirees who believe their incomes are protected from inflation could wake up rudely in the coming months. At least ten million people are members of gilded defined-benefit pension schemes designed to offer protection against inflation.

Their monthly payments have been in step with the cost of living for years. But many of these schemes have a cap on inflation protection that is now being violated as the cost of living rises. They usually coincide with raising inflation to three or five percent, but not higher.

As inflation rose to seven per cent and is expected to reach ten per cent later this year, millions could see the purchasing power of their incomes fall in real terms by hundreds of pounds.

Out of pocket: Retirees will be hit by high inflation in the coming months

More than 4.5 million people already receiving a pension will feel the impact immediately, and a further 4.9 million members will notice it when they start drawing their pensions in the future.

Kay Ingram, a chartered financial planner at Ingram Insights, warns: “It is very rare for private sector pensions to be entirely linked to inflation.

“Even though inflation was low, retirees did not have to worry. But as inflation rises, many will be shocked and may need to rethink their spending plans. ‘

If inflation reaches ten per cent, retirees with limited inflation protection to five per cent will miss £ 7,000 in their lifetime, according to a survey by XPS actuarial consultants. This is equivalent to £ 400 less income each year.

If inflation remains high for some time to come, the consequences will also be felt by savers with the most generous pension incomes. Tom Selby, head of research policy at the AJ Bell asset platform, says: “If inflation averaged seven per cent, someone with a pension income of £ 10,000 and limited to five per cent would have a purchasing power of just £ 9,100 after five years. . ‘

Some of the largest pension plans in the country are affected. For example, the BT pension scheme – the largest corporate pension scheme in the UK – raises payments for some members in line with the Retail Price Index (RPI) inflation rate – but only up to five per cent.

The RELX pension scheme – formerly Reed Elsevier, an employee retirement plan for one of the UK’s largest publishers – also limits this level. RPI reached nine percent last month and looks set to continue rising.

Savers with public sector pensions do not suffer the same fate.

“Most public sector pension schemes increase by the full rate of consumer price inflation each year, which is really the gold standard,” says Hemal Popat, a partner at actuarial consultants Mercer. An increase in the state pension is also guaranteed, at least for the level of CPI inflation.

The rate used to calculate the increase each April is the inflation rate of the previous September. As inflation is expected to reach close to ten percent in September, retirees could find themselves in line for one of the largest percentages of the state pension so far next year.

Retirees, however, missed a higher raise in state pensions this year after the government lifted a triple lock that provides a raise for maximum inflation, wage growth or 2.5 percent. The state pension increased by 3.1% inflation and not by wage growth, which reached 8.8%.

Retirees living on annuities face an even greater struggle. Only 12 percent of annuities purchased since 2015 offer any protection against inflation at all. Most annuity providers – including Canada Life, Aviva, Just and Scottish Widows – offer annuities that increase in whole or in part with inflation.

However, few savers have bought them in recent years as they are expensive.

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