How inflation will hit your pension savings
Many pension schemes that offer protection from price rises may not be as good as they seem.


Millions of pensioners with supposedly gold-plated private-pension plans are going to take a big hit from inflation.
XPS Pensions, a pensions consultant, has warned that more than four million pensioners in final-salary schemes and other plans offering guaranteed retirement benefits will not see their incomes rise in line with soaring inflation – which is currently running at 10.1% – even though their schemes ostensibly offer inflation-proofing.
Why inflation will damage your pension
The problem is that while certain final-salary schemes promise inflation-linked annual pension increases to pensioners once they start receiving retirement income, the small print of most schemes imposes a cap on such rises.
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These caps, known as limited price indexation (LPI), typically restrict annual pension increases to 5%. Many pensioners will be unaware that their schemes feature LPI restrictions. Until inflation began to spike upwards at the end of 2021, it had not gone above 5% since the early 1990s, rendering LPI caps irrelevant.
Now, however, LPI means many final-salary scheme pensioners over the last couple of years will have seen their incomes go up by just 5% despite inflation running at more than twice that level.
Will inflation cut your pension savings by £25,000?
Not all final-salary schemes impose LPI restrictions, but XPS’s analysis suggests around 4.5 million pensioners are currently in schemes that do feature such clauses, predominantly in the private sector.
It suggests that the average 66-year-old pensioner could miss out on as much as £25,000 of income over their lifetime because of LPI, and also potentially face a squeeze on their household budgets in the short term as their income fails to keep pace with rising prices.
Those considering taking early retirement over the next couple of years could be particularly hard hit, XPS warns. In some cases, the trustees of final-salary pension schemes do have discretion to make additional pension awards to pensioners.
However, many schemes will lack the funding to show such generosity – and, in any case, trustees must balance the interests of different groups of members, avoiding measures that could reduce the benefits available to future pensioners, for example. Still, the news is better for this last group. In most cases, the pension benefits earned by savers yet to retire and begin claiming their income are not affected by LPI clauses.
Instead, the incomes they have saved for so far do increase in line with the full rate of inflation until they reach retirement. The controversy over LPI is likely to mirror the row about the extent to which state-pension payments should guarantee inflation-proofing. The government’s triple-lock promise – that state pensions will rise by the highest of 2.5%, inflation or average earnings growth – was previously suspended as earnings rose sharply following the Covid-19 pandemic.
However, it has since been reinstated. As a result the state pension increased by 10.1% in April 2023, meaning those receiving the full new state pension get £203,85 a week, or £10,600 a year.
The cost of paying the state pension has led to complaints that older people are being given more support than other groups during the cost-of-living crisis.
Additional contributions from John Fitzsimons

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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