Inflation has ravaged the value of the state pensionas 12 million pensioners got a pay rise of just 3.1% in April with the removal of the triple lockdown, while consumer price growth hit 11.1% in October.
Inflation now appears to have peaked, falling to 10.7% in November and 10.5% in December. More pronounced falls are expected.
Will next year be better for retirees? Maybe that’s right.
Inflation could be in full swing by the end of the year, with accounting group PwC predicting that it will end in 2023 at as low as 3%.
That seems a long way off, with food prices still rising 13.3% a year, according to the British Retail Consortium, while energy prices remain exorbitant.
Gas and electricity bills are expected to drop as wholesale natural gas prices fall in Europe, but we won’t see much of a difference before Easter, experts say.
We should see significant declines in inflation by the summer, when it could drop to 5 or 6%. At that time, the increase in state pensions should outpace the growth in prices, giving pensioners some breathing room.
Inflation has had a “devastating impact” on the purchasing power of our pension and retirement savings Isa, said Rio Stedford, financial planning expert at wealth manager Quilter. “It forced people to work longer and delay retirement in the short term.”
As if that weren’t enough, last year’s global stock market crash reduced the value of retirees’ professional and personal pensions.
The FTSE 100 could be close to its all-time highbut other markets are still well down and will continue to struggle until inflation is brought under control and central bankers such as the US Federal Reserve stop raising interest rates.
Stedford said retirees on the back or with Isas stocks and shares should try to stay invested to benefit from the market rally. Still, many will be forced to loot their pots as the cost of living crisis drags on.
The dwindling number of retirees on final-salary defined-benefit pension plans enjoy greater protection as they often receive indexed income, although some company plans impose a cap on this, Stedford added.
After more than a decade of slump, savings rates climbed last year, with five-year fixed-rate bonds paying 5% a year at one point.
It was still only half the rate of inflation, so even savers looking for a bargain lost out.
Those who did nothing were even worse off as savers are leaving a staggering £267.8billion in accounts that pay no interest.
A strange thing has happened in recent weeks, and it’s bad news for savers.
Banks and building societies have started cutting their best buy rates, despite expectations that the Bank of England will raise base rates from 3.5% today to 4% on February 4.
Savings providers are clearly calculating that this will be the last increase, with inflation waning thereafter.
READ MORE: Inflation is down and life is about to get better
That’s good news if true, but it still means retirees with money in the bank will get a lower return. It may be worth locking into a best buy fixed rate bond on either side of the next interest rate decision.
Kevin Brown, Savings Specialist at Scottish Friendly, said: “All savers can seek the best possible interest rate and for long-term savings consider investing to help protect your money from inflation. “
Savings rates aren’t the only thing to pull back, last year’s dramatic increase in annuity rates has also reversed.
The amount of income a 65-year-old single person could generate from a £100,000 pension pot has risen from less than £5,000 a year at the end of 2021 to over £7,000 a year later .
Now it’s down slightly to around £6,900. Again, lower inflation and interest rate assumptions are the reason.
Canada Life technical director Andrew Tully said anyone considering locking in an annuity shouldn’t hold back in the hope that rates will climb from here. “The biggest increases may now be over.”
The sooner we see a significant decline in inflation, the better. The problem is that many retirees cannot last long.