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Cost of living couple

Latest inflation numbers boost pensions but cost of living squeeze continues

 

  • Triple lock uplift means new State Pension to increase by at least £4.27 a week from April (currently £164.35 a week), and by £222 a year
  • Pensions lifetime allowance will go up by £24,800 to a new limit of £1,054,800 (currently £1.03m)
  • But inflation squeeze leaves UK households stumping up extra £18.8bn to maintain standard of living

The latest data shows UK inflation (CPI) grew by 2.4% in September 2018, down from 2.7% in August. The reported change in inflation for September is important as a number of state benefits are uprated annually in line with this data, although because of the triple lock guarantee (the higher of earnings, inflation or 2.5%), the new state pension will increase by 2.6%.

However, UK households will need to collectively find an extra £18.8bn a year if they wish to maintain their standard of living compared to a year ago, with each household typically needing to spend an extra £691 a year.

Andrew Tully, Pensions Technical Director, Canada Life commented:

‘The latest inflation numbers can best be described as a double-edged sword. A key state benefit, the State Pension, will increase by at least 2.6% due to the triple lock, which is only the second time the increase has been linked to wage growth.

‘People saving hard for retirement will now have an opportunity to save a little more into their pensions before they are hit by the lifetime allowance tax. Although this increase is welcome, the amount you can save into a pension is already capped through an annual allowance. To simplify pensions it would be much easier to ditch the lifetime allowance completely, however recent figures show just how much money Government is raising from these taxes.

‘For people who are struggling to balance the weekly budget, these latest inflation numbers will offer no respite. The inflation squeeze continues with households needing to stump up an extra £691 a year to simply stand still.’

History of the State Pension Triple Lock

Introduced by the Conservative led collation Government in 2011/12, the ‘triple lock’ guarantees to uprate the basic State Pension and new State Pension by the highest of earnings, prices (CPI) or 2.5%.

Since 2011/12, the following benchmarks have been used for the annual uprating in line with the triple lock guarantee.

2011-12 4.6% (RPI)*
2012-13 5.2% (CPI)
2013-14 2.5% (minimum uplift)
2014-15 2.7% (CPI)
2015-16 2.5% (minimum uplift)
2016-17 2.9% (earnings)
2017-18 2.5% (minimum uplift)
2018-19 3.0% (CPI)

Source: House of Commons Briefing Paper ‘State Pension uprating – 2010 onwards’

*RPI subsequently changed to CPI in the following years

History of the Pensions Lifetime Allowance

The Lifetime Allowance was introduced in April 2006 as a measure to restrict the overall value of pension savings. It was set at £1.5m in tax year 2006/07 and increased annually to a high of £1.8m in 2010-2012. The allowance has been reduced over subsequent tax years to a current £1.03m. The latest HMRC data shows the total tax take from the Lifetime Allowance charge has increased by more than 2000% from £5m in 2006/07 to £102m in 2016/17.

If the Lifetime Allowance continues to increase in line with CPI at 2.4%, then by 2022/23, the allowance could be £1,132,800.

CPI / tax year Lifetime Allowance
2.4% for 2019/20 £1,054,800
2.4% for 2020/21 £1,080,200
2.4% for 2021/22 £1,106,200
2.4% for 2022/23 £1,132,800

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