Pension chaos as inflation could dent your pot by £7,000 – cost of living bites
Martin Lewis lays out the two types of pensions
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Final salary pensioners have often been seen to have one of the best deals when it comes to retirement. However, these individuals could now be staring down the barrel of a damaged retirement in the current climate.
Millions of Britons who worked in the private sector, and who are in final salary schemes could face a £7,000 hit due to failing to proof benefits against inflation.
A cap on increases will mean these individuals no longer keep pace with price rises.
The majority of defined benefit schemes lifted benefits by a maximum of five percent per year.
However, this cap was cut to 2.5 percent by 2005.
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The Telegraph reports pensioners will lose an average of £400 this year alone due to inflation.
Across their lifetimes, this will cost Britons £7,000, which many cannot afford to lose.
It could mean a reevaluation of retirement and pension decisions to reflect a new reality of swelling prices.
Inflation has soared to seven percent already this year, and is showing no signs of slowing down.
Some economists have warned the increase in prices will hit 10 percent, a level not seen in many years.
Defined benefit pension scheme members in the private sector will therefore have to reckon with their pots failing to keep pace in real terms.
Defined benefit schemes are usually seen as advantageous as they pay out a set amount each year, depending on the length of a person’s service.
The secure income for life is meant to rise each year in line with inflation.
For this reason, the arrangement is often described as a “gold plated” pension.
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These schemes usually continue to pay a pension to spouses, civil partners or dependants when the scheme holder dies.
Tom Selby, head of retirement policy at AJ Bell, recently warned pensioners are set to feel the bit of inflation.
He said: “Soaring inflation is a real and present danger to UK pensioners.
“Those in drawdown can invest their cash to hopefully at least protect themselves against inflation over the long-term.
“However, they may also need to withdraw more income from their fund to maintain their lifestyle.
“It will therefore be crucial that retirement investors regularly review their withdrawal strategy in the coming years, ideally with a regulated adviser, to make sure it remains sustainable.”
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