Private sector left behind as public service pensions soar

Wealth divide warning as retired civil servants are on course for huge rises while private pots are ravaged by inflation, writes Jessica Beard

The stark disparity between goldplated public sector pensions and private company schemes is to be compounded further by soaring inflation. Rising prices will add thousands of pounds to the incomes of retired public sector workers, who are now in for a huge rise in their income, while those in the private sector suffer a pension cut as markets tumble.

Former doctors, civil servants and teachers with generous “defined benefit” pensions are on track to receive a 10pc boost to their annual pension income next year.

These costly pension schemes promise to pay a guaranteed income that increases by inflation each year, safeguarding pensioners from the worst of the cost of living crisis. Consumer price growth is expected to hit 10pc later this year, according to Capital Economics, a consultancy.

But those with “defined contribution” pensions, held by the majority of workers today, have no guardrails in place to protect them as prices soar. The responsibility for turning a pension pot into retirement income is on the saver in these pensions rather than the company they work for, unlike defined benefit pensions, which also tend to pay higher incomes.

Millions of retirees will lose thousands of pounds in real terms as inflation erodes their spending power. Meanwhile, a falling stock market has wiped more than 7pc off the average defined contribution pension fund in the past six months, according to data service FE Fundinfo. “Master trusts” – pension schemes used by multiple employers – dominate the workplace pension market. More than 17 million Britons have their pension invested with the three largest workplace pension providers – and all three have lost money this year.

State- backed Nest, which has 10 million savers, has lost 6.4pc over the past six months. The second largest, The People’s Pension, is down 5.1pc. The third biggest, Now Pensions, has shed 7.5pc. The vast majority of savers put their money into these organisations’ “default” funds, a one-size-fits-all portfolio usually tailored to their age.

Mike Ambery of consultancy Hymans Robertson said inflation exposed the real extent of the protection offered to defined benefit pension holders.

He said: “The disparity will be huge and there will be two different types of pensioner this year. Some of those in generous defined benefit schemes will get a greater pension increase next year than a salary increase had they still been working.

“Meanwhile, those with defined contribution pensions will be worse off, as they take all the risk on themselves and take the hit. They will see the value of their pension pots decreasing rapidly as markets fall and those approaching retirement might start to wonder if they can still afford it.”

Those nearing retirement in the private sector will grapple with fears of having saved too little and may be forced to delay retirement if they can.

However, many will be forced to dip into their pensions to make ends meet as they face the biggest cost of living crisis in a generation, Mr Ambery warned. Millions of pensioners have already had to cut back on spending as household expenses shoot up and the state pension loses value.

Mr Ambery added: “They could be cashing in at an inopportune time as markets are down and deferring financial pain until a later date if their pension isn’t large enough. If they need cash today the pension will be used, but this could cause standard of living problems later on if they end up relying on the state.”

Three quarters of women over the age of 50 do not believe they will be able to retire at age 66 and almost half of those asked said they worried that what they had saved for retirement now wouldn’t cover the cost of living, research by Unbiased, a directory of financial advisers, found. Nearly one in two over the age of 65 who had planned to retire in the next three to six months have had to return to work.

This will not be a concern for those with defined benefit pensions, who are guaranteed a rising income every year and are able to retire securely. In the private sector most defined benefit schemes have been closed to new members and accrual of benefits.

However, even these pensions are still less generous than their equivalents in the public sector, according to Colin Clarke of Legal & General, the pension provider.

He said: “Most of the remaining private sector defined benefit pensions are capped, so payouts will rise only by 2.5pc or 5pc rather than the full rate of inflation. There’s little that members can do to shield their income from the cost of living. Even so, they still have this element of protection that most people don’t.”

Savers can investigate the charges they pay on their pensions to make sure they are not unnecessarily eating into their retirement funds. The margin on fees can appear small but the difference can run into the tens of thousands of pounds over the course of a career, on even the most modest of pots.

Jon Cunliffe of The People’s Pension said: “Pensions are a long-term investment and it’s normal for fund values to fluctuate.” Nest and Now Pensions declined to comment. + 10% Pay rise for retired civil servants, doctors and teachers –7%

Fall in the value of private company pensions