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High inflation impacts timing of retirement decisions

High inflation impacts timing of retirement decisions

20 Jul 2022

  • CPI this morning reached 9.4%, as inflationary pressures push prices higher, continuing the trend seen over the last six months.
  • Whilst inflation is still predicted to rise in the short-term, longer term expectations of inflation have started to fall as the immediate causes of high inflation are not expected to last and the recent interest rate rises start to take effect.
  • Analysis from XPS Pensions Group’s DB:UK Funding Watch shows that, as a result of falling long-term inflation expectations, UK defined benefit long-term liabilities over the last three months have surprisingly reduced by around £140bn.
  • However, the majority of increases to members’ benefits will be based on inflation rates published later in 2022, and retirement options may not reflect this expected higher level of inflation.
  • This may mean that a member choosing to retire in early 2023 could see a material increase in their pension compared to retiring at the end of 2022 due to their benefit receiving an additional inflationary increase in 2023. This may equate to a c.7%* difference and over £10,000 worth of extra pension income over a lifetime for the average pensioner, therefore delaying retirement could be in some members’ favour .

Charlotte Jones, Senior Consultant at XPS Pensions Group, said: “Against a backdrop of rising prices, optimising retirement income is more important than ever. How a pension is calculated can be difficult to understand at the best of times and most members are unlikely to be aware that their pension could be very different if they chose to retire in 2023 compared to 2022. With inflation expected to fall in the long-term, this is only likely to be an issue that members will need support with over the next year or so. There are various ways that schemes can ensure their members have all of the information they need to navigate through their retirement decisions either via adjustments to retirement quotes or communicating with members.”

* this figure will depend on the CPI rate in September but the Bank of England have said that they expect inflation in the UK to rise to around 11% this year.