Inflation has skyrocketed in recent months as the UK economy recovers from the COVID-19 pandemic. This could have a severe impact on pensioners if it continues throughout 2022, according to a finance expert.
The rate of inflation for the year to September 2021 was 3.1 percent, and this is the figure which will be used to increase the state pension for the 2022/23 tax year.
That will add an extra £5.55 a week to the full new state pension, taking it from £179.60 per week to £185.15.
However, inflation has only gone up in the subsequent periods, hitting 5.4 percent for the year to December 2021.
That figure represents a 30-year high, stretching all the way back to 1992.
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“However, whilst most of these schemes do offer inflation-linked increases, they are capped at usually 2.5 percent or five percent.
“So, the reality is that whilst they will see their pensions increase, it is unlikely to keep pace with inflation.”
He added that this may leave pensioners in a tricky place and could mean they end up looking for alternative sources of retirement income.
Mr Hussain predicted that there will be an increase in equity release moving forward as pensioners look to use the value built up in their homes to fund their retirement.
However, he warned that people doing this may face a “double whammy”.
He explained: “If interest rates go up, their equity release mortgage rates will go up, meaning that their cost of borrowing is going to rise, potentially making equity release an expensive option.”
Mr Hussain also believes pensioners who were in defined contribution schemes and have purchased an annuity at retirement could face challenges.
“This is because the most popular type of annuity is a fixed rate pension with no inflationary increases built-in,” he said.
“This means that the buying power of their annuity is certainly going to fall over the next year, at a far greater rate than it has in the past.”
Like pensioners utilising equity release, people using income drawdown in retirement are also likely to face a double whammy of sorts, according to Mr Hussain.
“Not only may they find that they have to draw more out of their pension pot this year to cover their additional expenses, but if we see a stock market fall, like some analysts are predicting, these are the pensioners that could face the biggest hit, due to having to take more money out of a smaller pot,” he explained.
“Ultimately, this means their pot may not last as long as they may have expected when they retired.”
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