The UK’s consumer price index (CPI) this morning reached 9.4%, as inflationary pressures push prices higher, continuing the trend seen over the last six months.

While inflation is still predicted to rise in the short term, longer-term expectations of inflation have started to fall as the immediate causes of high inflation are not expected to last and the recent interest rate rises start to take effect, XPS Pensions Group stated.

Analysis from the firm’s DB:UK Funding Watch showed that, as a result of falling long-term inflation expectations, UK defined benefit (DB) long-term liabilities over the past three months have surprisingly reduced by around £140bn (€164bn).

However, the majority of increases to members’ benefits will be based on inflation rates published later in 2022, and retirement options may not reflect this expected higher level of inflation.

This may mean that a member choosing to retire in early 2023 could see a material increase in their pension compared with retiring at the end of 2022 due to their benefit receiving an additional inflationary increase in 2023, XPS said.

This may equate to an approximately 7% difference and over £10,000 worth of extra pension income over a lifetime for the average pensioner. Therefore, delaying retirement could be in some members’ favour, it added.

The 7% figure will depend on the CPI rate in September but the Bank of England has said it expects inflation in the UK to rise to around 11% this year.

Charlotte Jones, senior consultant at XPS Pensions Group, said: “Against a backdrop of rising prices, optimising retirement income is more important than ever. How a pension is calculated can be difficult to understand at the best of times and most members are unlikely to be aware that their pension could be very different if they chose to retire in 2023 compared to 2022.”

Jones noted that with inflation expected to fall in the long term, this is only likely to be an issue that members will need support with over the next year or so.

“There are various ways that schemes can ensure their members have all of the information they need to navigate through their retirement decisions either via adjustments to retirement quotes or communicating with members,” she added.

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