Wealthy losing thousands as inflation eats into pensions

WEALTHIER savers do not escape the spectre of increased living costs, a Scottish Widows’ Retirement Report has warned.

The life insurance and pensions group maintains the current environment of steep inflation is posing a real problem for the sector.

It cautioned: “High inflation erodes the value of savings for everyone. But the effect is obviously much greater for those who hold more cash.”

Last week we highlighted the general threat in this regard, but the top 25 per cent wealthiest households in the UK hold at least £54,900 in cash.

The report goes on: “The loss in value of those savings over two years is about £6,500, compared to a

£2,000 loss for the median household.

“High inflation also affects those with Defined Benefit pensions (often in the public sector) who can receive tax penalties for breaching the Annual Allowance.

“Those in Defined Contribution Pensions (Personal Pensions and the like) will face tax penalties of up to 55 per cent if their investments keep pace with inflation and their pot breaches the Lifetime Allowance.

“At present these allowances are frozen monetary amounts.

“The current Lifetime Allowance is £1.073 million.

“Cumulative inflation at 25 per cent since the freeze means the real value of the allowance will have fallen by almost £215,000.

“If they hold their pension savings in cash-like assets, those with sizeable existing pots are also more exposed to inflation eating away at their savings.

“A wealthier individual might have a pension pot of £91,000. If they hold half of this in cash like assets, they could be exposed to losses of about £3,400 in a single year and over £5,400 in two years, on top of £3,100 lost over the previous ten years, as a result of inflation.”

Scottish Widows says the selfemployed also face biting the bullet.

It goes on: “The share of selfemployed cutting back in ways that shows a deterioration in financial resilience is similar (31 per cent) to that of employees on permanent contracts (30 per cent), with 15 per cent of each cutting back on essentials.

“That said, there remain longstanding inequalities in retirement preparations between employees and the self-employed.

“More than a third (36 per cent) of the self-employed are saying that they are saving nothing for retirement.

“This is several times more than the rate for employees (nine per cent) and equivalent to about 1.2 million people aged 30-64.

“What we do also see in response to the rising cost-of-living is that the self-employed are more likely to be cutting back on their pension savings (19 per cent compared to nine per cent for employees). This is despite the fact they are four times more likely not to have a pension in the first place.

“This may reflect greater financial vulnerability amongst some self-employed.”

Turning to levels of financial resilience in ethnic minorities, those of black, Indian and Bangladeshi origin were generally on a par with white British.

“Many minorities are less likely in practice to report cutting back in ways that suggest deteriorating financial resilience,” states the report.

However, the one big exception to this is the Pakistani community.

“The Pakistani ethnic group are the most likely to report being very concerned about making ends meet (53 per cent compared to 36 per cent for White British) and they are also the most likely to cut back on items that indicate a deterioration in financial resilience (35 per cent compared to 31 per cent for White British). This is perhaps unsurprising given the fact that Pakistani employees have one of the highest wage gaps with those who are White British.”