In November, the CPI rate of Inflation reached 3.1 per cent, and Interest Rates doubled to 0.5 per cent. In order to meet its 2 per cent inflation target, the Monetary Policy Committee is likely to raise interest rates to as much as 1 per cent by the end of next year. The big question is, how is this going to impact your pensions, savings and investments?
⇒ Impact on Pensions
- State pension payments will rise:
The “triple lock” ensures that benefits will rise by the higher of inflation, wage growth, or 2.5 per cent. Therefore in April next year, weekly pension payments will rise by as much as 3 per cent. The full new state pension, which applies to those who reach retirement age after April 2016, will likely increase by about £5, to £164.50. The full basic state pension will rise by about £3.70, to £126 per week.
- The pension payments of retired public sector workers (linked to CPI) will rise by about 3 per cent.
- Some private sector pension payments will rise even further:
Some defined benefit pension schemes are linked to RPI inflation, which was 3.9 per cent. Pension payments linked to RPI will increase more compared to those linked to CPI.
- Pensions lifetime allowance (LTA) will rise to £1,030,000 in April 2018. For those that have used up all of their LTA, their maximum pension commencement lump sum (PCLS) will increase by £7,500.
⇒ Impact on Savings and Investments
- Interest rates on cash ISAs will rise:
Moneyfacts revealed that in October, the rates of interest on cash ISAs rose faster than any other savings products. However, there is still no savings product which beats the current rate of inflation, therefore the real value of all cash ISAs will fall – they will have less purchasing power. It is still better to invest your money.
- Fidelity calculated that if you had invested £15,000 into the FTSE All-Share index 10 years ago, you would have over £26,000. This is far better compared to the average savings account, in which £15,000 would amount to just £15,604 after 10 years.
The return on gilts and bonds would fall, as inflation reduces the real value of the fixed income paid by them.