A reflection on inflation, interest rates, and the current economic landscape for pensions

Many people will not be sad to see the back of 2022, particularly when it comes to the challenges that this year has presented for people’s finances. Indeed, the current cost-of-living crisis is weighing heavily on millions of Britons, eating into the relative value of their savings. 

Throughout the year, we have examined the impact of economic uncertainty and market fluctuations in our weekly blogs. Most notably we have looked at how soaring inflation and rising interest rates have impacted pension pots and retirement strategies. 

This year we have had three Prime Ministers and four Chancellors, but the same issues remain. With inflation set to remain above 10% going into the new year and economists predicting the country’s longest-ever recession, there are certainly challenges ahead.

As next week’s Autumn Budget approaches, it is important we continue to reflect on the effects of the current economic landscape is having on pensions and the steps the government must take to ease savers’ financial concerns.

The current outlook

The rapid rate of inflation over the past 12 months has led to a cost-of-living crisis unlike anything seen in the UK for almost half a century. As the economy sparked back to life after two years of Covid hardships, inflation sat at 5.5% in January – this has since risen sharply, with the latest figures putting the consumer price index, or CPI, at 10.1%.

Many people will not have encountered an economic environment as difficult, and the impact on pensions has been substantial. People spend decades working and contributing to their pension with the aim of retiring with enough money to maintain their desired retirement lifestyle. However, savers are now finding that their pension pots will not stretch as far as they intended due to the devaluating effect of inflation.

For pension planners, this means prolonged uncertainty for their financial future. Almost two-fifths (37%) of UK adults aged 50 and over believe that the cost-of-living crisis has made retirement impossible for the foreseeable future, according to My Pension Expert’s recent research.

Consequently, in an effort to counter rising inflation, the Bank of England has enacted eight consecutive interest rate hikes, increasing the base rate from 0.1% to 3% in the last 11 months. 

As a rule, higher interest rates ought to benefit pension pots. It will mean that savings sat in many types of pensions will increase in value more significantly. But it is not always that simple. For one, the returns on some pension pots or investments might not be linked to interest rates. They may instead be reliant on the performance of other assets or markets, such as stocks and shares. In other cases, there may be delays before a higher Bank of England base rate translates into better interest on pension pots and savings accounts. 

Indeed, changes to interest rates and inflation, along with notable fluctuations in financial markets, are critical times for people to take stock and assess their financial situations. They must ask whether they are comfortable with where their money is saved or invested and how confident they are in their longer-term financial strategy. This is particularly true of those preparing to enter retirement.

Accordingly, many will be looking to the Government to bring a sense of calm and clarity next week (17 November) in their Autumn Budget.

Protecting pensions in the Autumn Budget

It is vital that the Budget puts a spotlight on protecting pensions and reassuring savers with a strong economic strategy. 

Of course, a key aspect of the fiscal plan will be bringing inflation under control. Until it drops notably – towards the Bank of England 2% target – people’s savings are losing value in real-terms, and thousands will be forced to return to work. Moreover, until inflation is brought under control, interest rates are likely to rise further, increasing the cost of borrowing and hurting those with debts like mortgages. 

Meanwhile, top of the priority list for retirees will no doubt be a commitment to the triple lock, which would see the state pension increase in line with surging inflation. Last year, pensioners were denied the extra few hundred pounds a year after then Chancellor Rishi Sunak froze the triple lock. Now, as Prime Minister, pensioners will be looking to Sunak to commit to the policy in order to give pensioners breathing space to effectively plan their finances. 

More long-term assistance is also needed. Fast-tracking the long-awaited – and frequently delayed – pension dashboards programme should be a priority. As discussed in our previous blog on online guidance and effective pension planning, the programme is designed to allow pension planners to see all their retirement savings in one place; it will provide simple information about their multiple pension savings in the hopes of empowering people with more convenient access to their own financial information, in turn helping them to make better decisions.

Finally, when the Chancellor announces his fiscal statement next Thursday, there must be assurances on improving access to independent financial advice. In the current climate, having expert assistance to overcome the challenges of rising inflation and interest rates can be extremely beneficial.

The Government needs to focus on creating clear pathways to advice by educating the public on its benefits and how to find a regulated financial advisor. Further, there needs to be a wider understanding amongst savers that independent financial advice is for everyone, not just those within a certain wealth bracket. 

Clearly, there are big challenges ahead. Protecting Britons’ hard-earned pensions will require a strong economic plan to fight the growing cost-of-living crisis and rising inflation and a policy aimed at improving and simplifying pension planning and access to advice. We will have to wait until 17 November to see if this is the case.