The good, the bad and the risky

State pensions are up by over 10%!… But ….there is also bad news….but….. some other news may help.

The Good News

From April 2023 the State Pension will increase a lot. The flat rate State Pension will rise by a whopping 10.1% to £10,600 per year. This is due to inflation at 10.1% being the highest of the current triple lock or earning growth, inflation and 2.5%

If your State Pension is in payment, you may not get the new full flat rate State Pension, but whatever you do get, it will increase by 10.1%.

Everyone who retires in future can expect their State Pension to be higher as a result. In Guiide, we allow for 2.5% increases in future, so when the actual amount is in excess of this, we update to the actual higher figure and project forward from this figure in our calculations.

Another piece of good news for those with large pension pots is that the maximum value of your pension pots before you have tax issues (known as the lifetime allowance) has been scrapped. We now allow people to put in pots of over £1m. We didn’t previously, as it would have meant lots of additional calculations and to be honest, we thought if you had a £1m pension pot you could probably afford advice!

Finally, you can now pay in more to a pension and get the tax breaks. £60,000 a year if you have not started accessing your pensions (and you don’t earn a fortune), or £10,000 if you have already started accessing them.

OK that’s the good news, what’s the bad news.

The Bad News

As inflation is high, the cost of living, as I am sure you are all aware, has also gone up.

For retirees and people looking at what they may need when they do retire, we use the Pension & Lifetime Savings Association’s (PLSA) Retirement Living Standards. This gives our users an idea of what is needed for a minimum, moderate and comfortable retirement.

Users can change these figures but they provide a great base for the after tax income needed for different types of retirement levels. So how have these increased from 2021 to 2022, when we have the latest data?

Looking at a single person, living outside of London, these annual amounts are:

  • Minimum – 2021 £10,900 – 2022 £12,800 – Increase 17.4%
  • Moderate – 2021 £20,800 – 2022 £23,300 – Increase 12.0%
  • Comfortable – 2021 £33,600 – 2022 £37,300 – Increase 11.0%

So, even though the State Pension has increased markedly, the cost of living for retirees has increased by more, especially for those on lower incomes. This will cause real issues for many.

And finally…..the Risky (or rather risk free news)

There is something else which may help meet this cost of living issue.

A year ago the return on risk free investments, UK Government bonds, known as Gilts was around 1%. Now these are more like 3.5%. This means you can invest in risk free assets and get higher growth than previously.

The return on other assets can reasonably be expected to increase over the longer term also. Why would anyone invest in other more risky assets such as shares, if you don’t expect to get at a higher return, than what is available on these risk free investments?

There is, of course, no guarantee with any riskier asset but increasing the expected growth on these assets seems reasonable. So, we have increased the expected rates of growth in our calculations. What we use for a medium risk portfolio has been increased from 3.5% a year to 5.0% a year for example.

So how do you update this information in your Guiide plan?

  • First log into Guiide and go to main journey
  • The expected State Pension will be updated automatically if you are below State Pension Age.
  • If you are currently receiving your State Pension just update it to the new amount you are being paid in April.
  • For the PLSA standards, go to the Wants page. Switch between the living standards to see the revised figures. Update your desired starting income if you want to
  • For expected growth rates, go to the Design page. You will see the rate you previously selected and the approximate risk level this now relates to. Simply choose what risk level you think is appropriate to you and decide if that expected level of growth (after charges) seems reasonable. If not, you can still adjust it.
  • Remember nothing is certain in life except death, annuities and gunfights in a western, so there is no guarantee these returns will happen, they are always just an estimate.

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