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Purchasing power of state pension schemes reduced as inflation bites | Personal finance | Finance

Worse still, the purchasing power of today’s pensioners has been hit by the suspension of the government’s triple-locking pension policy. Tom Selby, head of pension policy at AJ Bell, said the state pension “should have gold-plated protection in the form of the triple lock”.

This is a commitment from the Conservative Party manifesto to increase payment based on the highest average wage, inflation or 2.5%.

Mr Selby added: “However, a combination of the decision to remove the income link for 2022/23 and the use of September’s 3.1% inflation figure to increase this year means that in reality , millions of pensioners will see their state pension purchasing power reduced over the next 12 months.

“It should be noted that only the basic and flat-rate state pension generally benefit from the triple lock.

“Other elements of the old state pension and pension credit are simply linked to inflation, with the September 2021 rate being used again.”

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Elsewhere, savers who cut their contributions amid the cost of living crisis could face serious consequences in retirement, the expert warned.

Savers feeling the pain during the cost of living crisis may be tempted to cut or cancel their pension contributions, but an expert has warned this could do serious damage to pension plans over time.

Mr Selby warned: “Whether you are saving for the future, approaching retirement or already drawing income from your pension, the impact of the cost of living crisis will likely be felt in a variety of ways. .

“The extent of this impact will depend on a range of factors, including your income, spending habits and how long the price spiral lasts.

“A short, sharp spurt in inflation would be extremely painful for many, but the real fear is that the cost of living will continue to rise for an extended period.

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“People at different stages of their retirement savings journey will also face different challenges in this environment, from maintaining a long-term savings plan when you’re younger to increasing retirement income. “

Mr Selby urged Britons to check their financial situation in light of these new circumstances, cut spending where possible and set a clear budget based on their spending and saving priorities.

Saving for retirement in times of financial difficulty can become a much more difficult task.

Mr Selby explained: “If you are saving for retirement, probably the biggest challenge posed by the cost of living crisis will be maintaining your current pension contributions.

To demonstrate the impact, AJ Bell used the example of a 30-year-old man who has just started a new job and has not yet contributed in retirement, assuming he earns £30,000 a year and that his salary increases by 2% each year.

If they saved in their employer’s pension plan, eight percent of their salary would go to their retirement.

If, despite the cost of living crisis, they decided to stay in the scheme and enjoyed 4% annual growth in their investments, AJ Bell says they could have a fund worth £306,000 age 68, which would be their expected retirement age.

This assumes that their contributions to the pension plan are based on total earnings.

If they withdraw from their occupational pension scheme for three years, their fund at 68 could be worth much less at around £269,000.

Deferring savings in a pension for three years would therefore be tantamount to losing £37,000 of their kitty.