The surge in inflation may lead to pressure on the Government to reconsider the April 2022 pension increase according to Steve Webb, partner at LCP.  Next April, the state pension is due to rise by 3.1%, in line with the rise in the Consumer Prices Index (CPI) in the year to September 2021.  But this morning’s figure for CPI is an increase of 5.1%, with further rises expected between now and next April.  Without further action by the government this could lead to a significant squeeze in the living standards of more than twelve million pensioners.

Key points are:

• Those wholly dependent on state pensions and benefits will see their incomes rise by 3.1% but the prices they pay have risen by at least 5.1%, and probably more by next April; this means a real cut in living standards of 2%, even for the poorest pensioners;
• Those who also receive company pensions or private pensions may face a bigger squeeze; not all company pension payments are fully protected against inflation, and anyone who bought a ‘level’ annuity gets no annual increase at all;
• Inflation will erode the spending power of savings which pensioners hold in ISAs or other investments; money held in cash ISAs will often generate interest close to zero; with inflation at 5.1% and rising, the real value of those savings will fall by at least 5%;

Although DWP have argued that the state pension rate for 2021/22 has to be decided before Christmas, there is a recent precedent for later changes to benefit rates.  In the March 2020 Budget the Chancellor announced a £20 per week increase to Universal Credit to take effect just one month later, whilst in the Autumn 2021 Budget the Chancellor announced changes to Universal Credit system which would take effect within weeks.  On this basis there will be growing pressure on the Government in the coming months to think again about the 3.1% state pension increase, especially if inflation continues to soar.

Commenting, Steve Webb, Partner at LCP said:

“Unless the government re-thinks the 3.1% state pension increase, 12 million pensioners could face a significant squeeze on their living standards next year.  Not only will state pension payments fall in real terms, but income from private pensions will be squeezed, and inflation will eat away at the value of savings held by pensioners in cash ISAs and bank accounts.  The Government has shown that it can change Universal Credit rates at short notice when it wants to, and it will now come under pressure to re-think the modest state pension increase it had planned for April 2022”.