High Inflation Threatens To Raise Nightmare Scenario For Pensioners

30th March 2022

This article was published in the Times. The author was Paul Johnson. It was republished on the web site of the Institute for fiscal Studies and for copyright reason we are showing extracts with a link at the bottom to the full article.

I want to talk about one particular group though: pensioners. Or more particularly what the recent inflationary surge tells us about pension policy.

Back in the 1970s it was pensioners who suffered most from rampant inflation. Many of those with savings saw the value of their savings decline dramatically. There was little inflation protection even for the final salary occupational pensions that many benefited from. A feeble flat rate state pension was barely enough to live on. For the next 20 years much pension policy was designed to help mitigate those sorts of risks. The state earnings related pension scheme, Serps, was introduced in 1978, giving an earnings-related, inflation protected, pension to anyone without an occupational scheme. Various pieces of legislation provided for inflation protection within occupational schemes. Since the 1970s pensioners as a whole have moved from being the poorest group in Britain to being among the richest.

Today many pensioners will have some protection from inflation, though like their working-age peers their state benefits will rise only by 3.1 per cent. There are still large numbers who depend on state benefits for most of their income. They are going to have a tough year. Most of those with occupational schemes will have some protection against rising prices, but often limited to a level below current inflation rates. It's what's happening to those with new-style defined contribution pensions that worries me most, though, because it is a window on to the troubles we are storing up for the future.

Nearly all the infrastructure designed to protect pensioners against inflation has been dismantled. Serps has been abolished. Outside of the public sector there are essentially no defined benefit occupational pensions. Defined contribution pensions are the only game in town. But, as I have written here before, they aren't really pensions at all. There is no compulsion to turn the accumulated pot into an annuity. Those who do buy an annuity almost never buy one with any inflation protection: it just looks too expensive.

In the future then the huge majority of pensioners will be dependent on their own pots of savings. Some will have annuities which don't rise with prices. Only retired public sector workers will have any protection for inflation beyond their state benefits. It'll be a return to the 1970s where inflation can quickly undermine a lifetime's careful husbanding of resources. It's hard enough to navigate this new world of personal responsibility, individual savings pots and drawdown options in a world of low and stable inflation. In a world of high inflation, it will become nightmarishly difficult.

What’s worse, the amount that can be saved in a pension is being squeezed harder year by year as both the lifetime and annual allowances on what can be contributed are frozen in nominal terms. Just as the chancellor is banking the extra tax from keeping the income tax personal allowance frozen, he is accelerating the decline in private pension provision.

Read the full article HERE

Paul Johnson
Paul has been Director of the IFS since January 2011. He is also currently visiting professor in the Department of Economics at University College London. Profile and links to his recent publications

Web site - https://ifs.org.uk/