Rising inflation has been a theme of 2022, and September’s inflation figure has now been announced, with the Consumer Price Index (CPI) at 10.1%. According to the Office for National Statistics, this has been driven by increases in the price of food despite declines in fuel prices.
September’s CPI is a significant figure, as each year a number of pension schemes use this figure to uprate pensions from the following April.
Most schemes, however, cap their inflationary increases to pensions in payment and in deferment, with a common cap of 5% applying, meaning the inflationary increase applied to many pensions will be much lower than inflation.
It is therefore important to check the scheme rules of your pension scheme to understand how any inflationary increase is applied. This is something that we undertake at Eldon for our clients and factor into our financial planning.
The September figure is also the inflationary figure used by the government for increasing benefits and the State Pension.
The State Pension, as things stand, increases in line with the triple lock, which is the higher of:
If the triple lock is maintained, we will see the State Pension increase by 10.1% from April 2023. This means the new State Pension amount would be £203.85 per week, up from £185.15 per week. With a Conservative Party leadership contest now underway however, we await confirmation of the government’s commitment to the triple lock.
The average wage element of the lock was temporarily suspended in April 2022 to avoid a disproportionate rise in the State Pension, breaking a key manifesto pledge by the Conservatives. Historically, the largest triple lock increase to the State Pension was 5.2% in 2012/13.
Previously tax thresholds, Lifetime Allowance (for pensions) and Inheritance Tax nil rate bands were due to increase by inflation. These were frozen in April 2021 following the pandemic however, meaning tax thresholds are not increased by this significant level.
Rising inflation remains a concern for the Bank of England, and with inflation at more than five times the target of 2% for CPI inflation, it seems likely that future base rate increases in the short term are to be expected.
At what level and how long interest rates may stay at a raised level is unknown. This will undoubtedly be influenced by the UK government. As we have seen over the past 6 weeks, the landscape for this can change at a fast pace.
