Wednesday, 17 October 2018
Inflation and State Pension Increase
The CPI figures released this week show consumer prices fell in September to 2.4% compared to 2.7% the previous month and 3.0% in September 2017. This months inflation figures are used by the Department for Work and Pensions to set how much pensioners receive from the start of the new tax year in April 2019.
The current triple lock system, which should remain until the next general election, means the State Pension rises by the greater of annual price inflation, as measured by the Consumer Price Index (CPI), earnings growth or a minimum of 2.5%.
Earlier this year I became eligible for my state pension. Earnings growth is currently 2.6% so this should be the figures the DWP use for pensions. I get the new flat rate pension which will increase by £4.25 per week from £164.35 to £168.60 per week (£730 per month). I am not sure whether the state pension increase will cover my actual increased cost of living this year. For example, my council tax was hiked by 6% in April to cover addition 3% spending on social care however my car insurance was actually lower this year by around 5% (renewal with same car & same insurer).
Public sector pensions, such as those paid to teachers, police and NHS staff, will also rise in line with CPI. In addition, the 'lifetime allowance' for private pensions should increase by £24,800 from April 2019. That will mean an individual can have a total pot of £1,055,000 across their private pensions without facing a tax charge.
It will be interesting to see if Mr Hammond makes any further changes to pensions in his budget later this month.
According to the OECD, our state pension equates to ~23% of average earnings. This should increase to nearer 30% as more people retire on the new flat rate pensions which started in April 2016. Currently, most pensioners will be stuck on the 'old' system which is much less generous at £125.95 per week rising to £129.25 from next April apart from those who are topped up with the means tested pension credits.
Most welfare benefits such as Jobseekers allowance are frozen until 2020 so they will not see any increase next year. However PIP (disability) and maternity benefits will increase by the 2.4% from next April.
The Bank of England base rate has remained at a 300 year low since 2009 for most of the past decade. It was increased to 0.75% in August and my building society passed on some of the increase. I am expecting a further rise to 1.0% in the coming months but probably after the situation on Brexit becomes clearer.
In the US, the Fed have increased their base rate 3 times over the past year from 1.25% to currently 2.25%.
The next financial event will be the Chancellor's budget on 29th October.