Pension savers on track for ‘higher income’ despite high levels of inflation | Personal Finance | Finance

A couple check their finances

The value of pension pots may increase thanks to high interest rates (Image: Getty)

With the latest figures for inflation remaining at 8.7 percent for the year to May 2023, pension savers may be wondering how much rising prices will eat into the value of their retirement savings.

However, the Bank of England has continued to raise the base interest rate in its efforts to bring down inflation, with many savings providers passing on the increased rates to their customers.

Sam Cawley, investment director and chartered financial planner at Nelsons, said the current high interest rates could have a positive effect on pensions growth.

He told “While high inflation and increasing interest rates are making lives tough for millions, counterintuitively at a time like this, the value of people’s pension funds and other investments can do very well.

“Pension funds tend to be, at least in part, invested in company shares both in the UK and around the world, so price increases can mean that these companies are making higher returns.

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“For example, the S&P 500, which tracks the largest 500 companies in America, has risen by over 14 percent so far in 2023.

“In addition, for people reaching retirement now, the increasing interest rates could mean increasing annuity rates giving them a higher income throughout their retirement.”

He urged Britons saving up for their retirement to aim to keep up their contributions despite the growing pressures of paying for everyday needs now.

He explained: “People will have to make difficult choices with costs increasing across the board, and it can be tempting in some cases to focus on short-term bills.

A woman checks her bills

The value of pension pots may increase thanks to high interest rates (Image: Getty)

“However, not saving for the future can just push problems further down the line. While a temporary reduction in pension payments might be the only solution in some cases, it will be important to reinstate these when things get better and ideally maintain a level of contribution that ensures you still receive any contributions your employer may make for you.”

In contrast, David Macdonald, founder of Path Financial, told pension savers will see the value of their savings decrease and they will need to “accumulate bigger pots” to make up for the difference.

He said: “It’s tempting to stop making savings when income is tight. But often that is storing up problems for the future since getting back into the savings and pension contributions discipline is often hard after you have stopped.”

He also said rising prices will affect those already deriving an income from their pensions. He explained: “For people of fixed pensions, of course their buying power diminishes as prices go up.

“Some schemes have an annual increase but it is usually limited to three percent or five percent so if inflation persists at levels above that then even these pensioners will start to see their incomes go less far.”

A woman checks her finances

The value of pension pots may increase thanks to high interest rates (Image: Getty)

Analysts are predicting inflation will go down later this year with the Bank of England aiming to reduce inflation to its two percent target.

Mr Macdonald said pension savers should be invested in a “diversified portfolio” which can beat the rate of inflation.

He commented: “We believe that ‘green’ investments will perform better since solutions for people and the planet are essential whereas investments in dinosaur industries like oil and coal are set to underperform over the timeline of a long-term investment like a pension.”

Another important element of a person’s retirement income is their state pension, which is currently inflation-proofed thanks to the triple lock policy.

This guarantees state pension payments increase each year in line with the highest of 2.5 percent, average earnings or inflation. High levels of inflation meant state pensioners had a record 10.1 percent boost in April this year.

A person typically needs 35 years of National Insurance (NI) contributions to get the full new state pension, which is currently £203.85 a week, or £10,600 a year. For the full basic state pension, which is £156.20 a week, a person usually needs 30 years of contributions.

People can usually top up their NI contributions up to six years ago but at present they can do up to 16 years ago, as far back as the 2007/2007 tax year.

Individuals can top up their contributions over this extended period until April 2025, after which the system will revert to the usual six-year limit.

Mr Cawley said it’s important for people to make sure they are on track to get the full state pension but people do not have to top up immediately, thanks to the extended deadline.

He said: “Paying current bills and reducing expensive debt might be a higher priority at the moment but people should try and keep this under review for the long term and still try to make sure they qualify for a full state pension.”

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