The impact of inflation on those with lowest pensions.

Many will be hitting the buffers this year

Inflation is at a thirty year high. It will hurt the poor much harder than the rich. This is why.

The real cost of living for those for whom these items are part of a staple diet has increased by more than inflation , which is why the poor will suffer from food inflation more than middle and upper class people (you and me). People who have the time and education to read my blogs are not worrying for themselves (but I hope they are worrying for others).

In little more than two months, energy bills will rise by 50% and we know that the poorest over-pay on energy too.

In that same month, the state pension will go up by 3%. By the time we count in fuel price increases, that could mean benefits-dependent pensioners getting a real pay cut of 5% or more. Unlike us, people who spend their income have no buffer for pay cuts like this.

For those who spend all of there income, there is no buffer.

We talk about buffers in pensions all the time. We want to build in contingencies to protect incomes from falling (we call it prudence). It’s a marketing thing, it makes products and services more appealing as we can promise no nasty surprises.

But if you are spending what you are earning there is no buffer when prices go up and pensions go down (and the state pension will go down in terms of CPI, more in terms of RPI and even more in terms of Jack Monroe’s food basket.

Financial products are not built for everyone. Just look at the way we have ignored the cost of pensions for the 1.7m low paid who have not been given savings incentives because they were in the wrong kind of pension scheme. It will take 10 years of campaigning to get them any redress and then the redress will only be going forward.

We talk of the importance of advice but paying for advice is way beyond the budget of people on low earnings. We tell these people to have an interview with Pension Wise to understand the difference between annuity and drawdown products, but if you are living hand to mouth, you aren’t buying drawdown or annuities, you want an increase in your retirement income, a top-up to your income whether through wages , benefits or from whatever your pension savings can give you.

Many people think that it isn’t worth paying a pension of a few pounds a month, but a few pounds a month is what can make the difference between relying on a food bank or going to a supermarket. You don’t need to be Goerge Orwell or Jack London to know what it’s like going to a food bank -it’s degrading.

Pensions for everyone

We want a pensions system which is more inclusive, we want to tear down the barriers to entry to auto-enrolment, taking away the LEL, reducing the earnings trigger, including the self-employed and starting people saving at 18 not 22.

But if we do that, we need to think about the benefit of auto-enrolment to those who enter the pensions poor and leave them poor. We need to think about efficient ways of converting this extra saving , from those who are saving out of subsistence wages, into extra income which rewards their saving.

That means excluding pension saving from means tested benefits (something that doesn’t happen today) and it means paying people with small pots , fair pensions. By “fair”, I mean not excluding those with limited savings from pensions (as happens with annuities and drawdown – where the costs at entry and in management are prohibitive).

It means thinking of pension payment systems that can distribute a few pounds a month (or a week) directly to a pensioner with minimum intervention. This can and is achieved all over the world through the use of digital payment systems. It means using collective means of pooling savings and managing mortality for the benefit of the pool, as can be done with CDC). It also means recognising that the kind of buffers which we have built into the system to protect those in DB schemes are a luxury that cannot be afforded. We cannot afford to invest in financial products such as gilts and cash deposits that offer a negative real return.

Above all else, we cannot exclude the poor from a pension from their savings, when we have coerced them into saving for a pension through auto-enrolment. The millions of people with pots less than £10,000 can’t just be abandoned as pension failures and left to their own devices when they get past 55. They need a pathway to a pension.

The State Pension remains the most important benefit for the low-earners. It is exactly what a pension should be and it offers people on low incomes a clear promise which improves as time goes by because we have a triple lock. We need to maintain the triple lock and use the state pension as a benchmark for how we communicate pensions to ordinary people.

I include three recent screenshots of my pension entitlement as an example

And if the financial services industry cannot come up with a cost-efficient pension scheme for the poor, we should considering opening the state pension to “transfers-in” of small pots, with a view to paying to extra pension for people’s meagre savings.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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9 Responses to The impact of inflation on those with lowest pensions.

  1. John Mather says:

    If you look at the times when national debt was as high as it currently is inflation is a consequence I mention this last year so why the surprise ? RPI is 7.5% and it will be in double digits by April. Have a look at history particularly 1916 and 1947. Devaluation, default on bonds. The way this hapless government is going the U.K. will be out of the G7 before it can gag it’s critics and the BBC

    So you will be lucky if the State pension survives and worried about social unrest

  2. Brian G says:

    Possibly true. But the real issue is why a supposedly civilised society creates such massive disparities in wealth between those who have and have not. People on massive incomes and people and companies with massive gains are so concerned with opposing tax rises and benefit increases that they close their eyes to the poverty of millions. I don’t disagree with what you say but would have to say giving someone a cdc pension of a few quid a month is just pissing in the wind.

    • John Mather says:

      History is there to be studied so that predictable events can be anticipated. The elephant in the room was the mis selling of DB ia monumental failure unless underwritten by the tax payer Why is the liability to unfunded public service pensions allowed to escalate? How much is it now £ 2tn -£4tn what impact will 7.5% RPI have there. Revisit Heisenberg’s Uncertainty Principle we don’t need more pundits we need more action and leadership if you want social justice. Complaining that asset prices rise when you have excess debt devaluation and inflation is as useless as trying to pull yourself up by the handles of a bucket you are standing in

  3. “ That means excluding pension saving from means tested benefits”

    That’s actually very regressive, it would give more to the bigger savers.

  4. henry tapper says:

    Gareth, like Frank Field, I aspire to a day when we don’t need means testing though I accept your point. We need to upgrade state benefits through the state pension – but I do take your point (for now).

  5. John Mather says:

    DB worked when leavers were robbed to benefit long term workers and uplifted 60th bosses. Now it is supported by making it impossible to give transfer advice. Why? Because if all left the fund would be insolvent. The protection fund needs funds to be levied on survivors what happens when there are no survivors. Could we have done it differently? Norway did not use its oil revenue to prop up a a failing economy as the U.K. did. The U.K. has a need for radical change. Liberals should merge with Labour to give a viable opposition. radical policies on redistribution are required but education innovation and a favourable new business environment needs to be encouraged Brexit needs to be abandoned and reversed. You need productivity to be able to afford services like NHS, & State Pension that gives a living wage. When the MPs have the worst pension then they might understand the issues forget Regional assembly build the new National Parliament in Rochdale

  6. John Mather says:

    I am contemplating putting some money into writing an app that guides people to a known outcome Would you be interested in helping with the algorithms? I have a software project maturing in June with profits that can be utilised for this. Users would be free revenue from quality adverts

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