Civil servants to enjoy bumper pensions while other workers' payouts are capped

Retired doctors and civil servants will be better shielded from the worst of the cost of living crisis

Millions of retired private sector workers will see their income fall by 8pc in real terms next year, as public sector pensions soar.

They will be denied an inflation-linked increase in their pensions, while former civil servants, doctors and teachers with generous “defined benefit” pensions could be handed a boost of up to 13pc to their annual pension income, funded by taxpayers.

The Bank of England has predicted that inflation will hit 13pc this October, but annual increases for private sector “defined benefit” pensions are capped at 5pc. Pensioners are on course for a second blow in 2024, as inflation is expected to remain around the 10pc mark next year.

A former private sector worker receiving a defined benefit pension worth £20,000 each year would be out of pocket by £1,600 next year alone. That amounts to a real terms loss of £32,000 over a 20-year retirement. But this could nearly double as the cap will leave them vulnerable to next year’s high inflation too.

Steven Cameron, of pensions group Aegon, said the 5pc cap had largely gone ignored when inflation remained low but will have a big impact now. The upper limit was designed to protect employers from having to hand over unsustainably large sums to pensioners if inflation spiked, he said.

But in the case of public sector pensions, it is taxpayers who will fund the uncapped, record rise. These costly pension schemes promise to pay a guaranteed income that increases by inflation each year, shielding pensioners from the worst of the cost of living crisis.

Those with “defined contribution” pensions, held by the majority of workers today, will be the most vulnerable to rising prices as they have no guardrails in place to protect them. These money purchase pensions tend to be largely invested in stock markets, which have taken a tumble and have no guaranteed inflation increases.

Baroness Ros Altmann, a former pensions minister, said that public sector pensioners have for a very long time been the “pension aristocracy”.

“They have a totally guaranteed pension and will have peace of mind even through the cost of living crisis,” she said.

“These large pensions were based on the idea that public sector workers would have less pay today but a high pension in future. But general pay has increased so much that it is at least as high if not higher than private sector pay.”

Ex-public sector workers have a more secure pension than the state pension, she added. “The state pension triple lock promise was broken this year but public sector pensions are guaranteed by law to rise with inflation so that can’t happen.”

Steve Webb, former pensions minister and now partner at consultancy LCP, said that there would be no respite in sight for those with private sector pensions that are capped as inflation is expected to stay high for a few years.

He said: “It’s tempting to assume that pensioners will be insulated from inflation because the state pension will be linked with rising prices but that’s not the case for many. In reality, it will be another year of squeeze where people are turning down the thermostat and making tough choices.”