The latest figures show the Consumer Price Index (CPI) measure of inflation for January 2023 dipped slightly to 10.1 percent. Many older Britons are due a payment boost in a matter of weeks when the state pension increases by 10.1 percent but high prices for everyday needs continue to be a challenge.
What does inflation mean for pensions?
Alice Haine, Personal Finance Analyst at Bestinvest explained: “Lingering high inflation delivers a blow to retirees on fixed incomes looking to maintain their purchasing power, particularly those solely dependent on the state pension who have a set amount to spend each month.”
However, thanks to the triple lock being reinstated, the state pension will rise by 10.1 percent from April, which will ease the strain for those receiving the payment.
Those on the full new state pension will see it increase from £185.15 a week to £203.85 – a boost of nearly £19.
Ms Haine said that in the meantime, retirees on lower or fixed incomes “will find their money does not stretch as far, while pension savers nearing retirement may be tempted to reduce or stop pension contributions as they prioritise higher living costs instead”.
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She added: “However, with the thresholds for the basic and higher rate of income frozen and the threshold for the additional 45 percent rate set to lower from April, increases in nominal pay are going to see more people drawn into the higher rates of tax.
“Already, a record 5.5 million are estimated to be paying 40 percent income tax, highlighting the importance of directing more money towards pension saving before the end of the tax year to reduce an income tax liability.
“Pension saving comes with generous tax relief, which is applied to people’s contributions at their marginal rate of income tax. While basic rate taxpayers get 20 percent added to their pot with each contribution, those on the higher 40 percent tax rate receive a further 20 percent in tax relief, while additional rate taxpayers receive a further 25 percent back.
“That means for every £100 gross contribution paid into a pension by a 40 percent taxpayer, the net cost is £80 for a basic rate taxpayer and £60 for a higher rate taxpayer, giving their pot a generous bump-up in tax relief of £20 and £40 respectively.”
Research from abrdn has found the cost of living crisis has reduced the standard of living for most people over the age of 55.
Colin Dyer, financial planning expert at the group, said: “It’s more important than ever to make your money work as hard as possible.
“Inflation has the power to erode hard earned savings, so if you haven’t already, now is the time to make changes to reduce its impact.
“That might mean considering where greater returns could be made on any existing savings, or perhaps even seeking advice to understand all your options.”
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Pensioners face rising energy costs in April when the cap set by the Government’s Energy Price Guarantee is increased.
This means average bills for a typical home in England, Scotland and Wales will increase from £2,500 a year to £3,000 a year.
The £400 energy bills discount going out to all households in England, Scotland and Wales is also coming to an end soon, with the final £67 discount in March.
State pensioners on Pension Credit will also get a payment boost in April, as payments are increasing by 10.1 percent.
The benefit tops up a person’s income to £182.60 a week for single claimants and up to £278.70 a week for couples.
Extra payments may be available in certain circumstances such as if a claimant cares for someone.
With the 10.1 percent increase in April, single claimants will receive a top up to £201.05 while couples will get a top up to £306.85.
Claimants will also receive a £900 cost of living payment going out to people on means-tested benefits over the coming year.
Some eight million pensioners will also get a £300 pensioner cost of living payment to be paid in late 2023.