How does 3% inflation affect you?

In October 24, 2017
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Inflation has reached 3%, the highest level since April 2012.

As with everything there are always winners and losers and this rise will have an impact on everyone.

With prices increasing by 3% and earnings rising by just 2.1%, the average worker will inevitably be worse off than a year ago.

However, if you are saving into a private pension or you are a pensioner you will see significant benefits.


State Pension Recipients

The first winners are pensioners; the 3% figure will be used to up-rate their state pensions in April next year. This will be the largest increase since April 2012.

If you receive the New State Pension you will see your weekly income rise from £159.60 to £164.38.

The triple lock ensures that pensions have risen by at least 2.5% every year since 2010. In years of high inflation – such as 2012 – they have risen by up to 5.2%.

The triple lock means that pensions rise by 2.5%, earnings or prices, whichever is the higher.

However, from 2020 onwards the government is committed to a “double lock”, in which only inflation and earnings will be taken into account.



Public sector workers

September’s CPI figure is used as the basis for payments to pensions, with some extra added on, depending on the area of work. This means that most public sector workers will see significant increases in their accrued pension benefits next year.

As a result:

  • Teachers will get a 4.6% increase (3% + 1.6%)
  • NHS employees will get a 4.5% increase (3% + 1.5%)
  • Police officers will get 4.25% (3% + 1.25%)

The rises will be viewed as some compensation for the 1% cap on public sector pay rises.



Pension savers

Another winner will be pension savers, the maximum amount you are allowed to save into a defined contribution pension scheme will also rise by 3%.

Currently, if your pension pot is worth more than £1m, there is a 55% tax charge on any withdrawals.

From April 2018, you will be allowed to save an extra £30,000 without paying tax.


Business Owners

Business owners will not benefit from the rise in inflation. As many as 1.8 million businesses will pay more in business rates from April, as the increase is linked to September’s Retail Prices Index (RPI).

This is usually higher than the Consumer Prices Index (CPI) measure, and last month was 3.9%.

According to the British Retail Consortium, businesses will be liable for an extra £273m next year.



High inflation is not good news for savers.

If inflation is higher than the rate of interest you earn on your savings, the value of your money is dropping in real terms. This will almost definitely be the situation for anyone with money stored in a traditional savings account or cash Isa.



An increase in inflation can often be bad news for pensioners and pension savers as it can erode their savings, but today’s CPI number will produce a relatively generous increase to both private pension savings and to the state pension. We will however have to wait to see if the Chancellor uses the rise in inflation as an excuse to raid pension taxation in the upcoming budget which is due on 22nd November 2017.


Jasmine has been a qualified Financial Planner since 2008. She has also been a member of the Society of Will Writers since 2012. She is passionate about helping Clients build their wealth and achieve the financial lifestyle they desire. Her areas of expertise are that of Savings, Investments, Pensions and Retirement Planning.

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