State pension warning: Inflation rise could lead to changes in payment rate
Budget 2021: Experts outline state pension changes
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Specifically, the current proposal to raise the rate of the state pension is considered too “modest” in light of how inflation has soared in the past month. Steve Webb, the former Pensions Minister, is sounding the alarm that 12 million pensioners could be at risk of falling into financial hardship as a result of their state pension being no longer enough to cover crucial living costs. Following the Government’s decision to scrap the triple lock pledge on state pensions, it has received backlash from many claimants.
Mr Webb, currently a partner with LCP, explained how the Government could navigate this situation in light of the surge in inflation.
He said: “Unless the government rethinks the 3.1 percent 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”.
While the Department for Work and Pensions (DWP) has asserted that the state pension rate for next year needs to be decided by Christmas, there is a precedent for later changes to payment rates if deemed necessary.
For example, the Chancellor announced a £20 per week raise to Universal Credit payments to take effect just one month later in March 2021.
Furthermore, for the most recent Budget, Rishi Sunak introduced massive changes to the benefits system which came into effect in a matter of weeks.
As a result of this, many believe it is within the Government’s power to make changes to the rate of state pension payments to mitigate the impact inflation will have on everyday costs of living.
Earlier this year, the Government confirmed its intention to scrap the triple lock promise associated with state pensions.
The triple lock is a guarantee, introduced in 2010, that the state pension would not lose value in real terms, and that it would increase at least in line with inflation.
Through this pledge, state pensions are set to go up by either the rate of inflation, 2.5 percent of by the average wage growth.
However, due average earnings being inflated due to furlough, the link to wage growth in the triple lock was suspended for a year.
Those entitled to the state pension and other benefits are set to see their payments rise by 3.1 percent in April 2022.
Earlier this week, it was confirmed by the Consumer Price Index (CPI) that inflation would go up to 5.1 percent.
In real terms, this represents a real cut in living standards of two percent, even for the poorest pensioners in the UK.
On top of this, those with private pension plans or a company pension are not immune from the impact of inflation, with anyone who got a ‘level’ annuity gets no annual increase at all.
Furthermore, inflation is set to erode the spending power of savings which pensioners hold in ISAs or other investments.
Any cash held in ISAs will generate interest close to zero due to inflation being at 5.1 percent and rising.
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