State pension could increase by £153 next year But only one savings account can beat inflation

15 October 2013


UK inflation in September sticks unchanged at 2.7% with the basic state pension likely to rise accordingly next year, from £110.15 to £113.10 per week. 

The consumer prices index (CPI), the standard measure for inflation showing how prices have changed over the last 12 months, stays at 2.7% as it was in August, according to the Office for National Statistics (ONS). 

The ONS say the figures, released today, continue the trend of broadly steady inflation since Spring 2012. Unfortunately for savers, there's only one savings account on the market currently that can beat inflation for basic-rate tax payers. 

What's behind the latest inflation figures?

An increase in the cost air fares was the main change, offset by decreases in petrol and diesel prices. Although prices for flights fell between August and September, the fall was less than that of previous years. Prices for motor fuels fell by 0.2% between August and September 2013 compared with the same time period in 2012. 

Meanwhile, the retail prices index (RPI) - the measure of inflation that includes mortgage interest payments - fell from 3.3% in August to 3.2% in September.

September inflation as a benchmark

The new pension rates for 2014-15 are predications at this stage but will be confirmed by the Chancellor later this year, and begin in April 2014. Basic state pension is normally increased in line with September's inflation figure. Under the government's 'triple lock', it is scheduled to rise with earnings, prices or by 2.5% - whichever is the highest. 

The pensions minister, Steve Webb, explained back in 2010 that the CPI figure for September is used because it's the most up-to-date that can be used 'which allows time for the necessary activities involved in changing both the legislation and benefit systems in time for the uprating date in April'.     

Only one savings account can beat inflation

So what do the latest figures mean for savers who want to beat inflation? A basic-rate tax payer would need to find a savings account paying 3.25% interest to beat CPI, and an account paying 4% to beat RPI.

It's even more difficult for higher rate tax-payers who would need an account paying 4.5% interest to beat CPI, and an account paying 5.3% to beat RPI.

Unfortunately, only one account can beat inflation and it requires you to lock your money up for a long time. The seven-year fixed rate bond from First Save pays 3.5%, but in such a volatile market you should think carefully before tying up your money.

Inflation and rising prices   

Although the basic state pension will rise in line with inflation, many who receive it may experience a higher 'personal rate' of inflation, due to the items that make up their most significant expenditure. 

The ONS has long recognised that disproportionate increases in some commodities, such as food or heating, may drive up the cost of living for some people more than others. Its website has a calculator that lets you work out your own rate of inflation and compare this with the national average. 

New Isa Limits for 2014-15 

September's rate of inflation also influences Isa allowances for the coming year, although final figures have yet to be confirmed by the Chancellor. 

The link is with CPI, so they are expected to rise by 3.2% (and then rounded up to the nearest multiple of 120). This would take the Isa allowance for 2014-15 from £11,520 to £11,880.

More on this...   

State pension explained- how the system works

How do I qualify for state pension- your entitlement explained

Which? Money Helpline- your pension queries answered