Home » Currency 101 » Why your pension could stretch further overseas

While the UK government is raising pensions in line with UK inflation, prices are rising much slower in many European countries. So who are the winners and who are the losers in overseas retirement? Ideally, you will be a retiree in Spain or France, with savings…

Unruly inflation continues to be a big deal both for householders facing the cost of living crisis, and for governments. Strikes are breaking out all over the country in a wide range industries, as workers try to keep up with rising prices.

But what of those of us who have finished working and are at the mercy of government decisions on pensions?

Thankfully, the UK government has decided to raise pensions (and benefits) in line with inflation, sticking to the ‘triple lock’ that means pensions rise by the higher of three measures: inflation using the Consumer Price Index figure (CPI), average earnings, or 2.5%.

Currently, CPI is 11.1%, up from just 2% a year or two ago. When averaged over the year, this means that pensions will rise by 10.1% in the spring.

Winners and losers

The good news for those retiring abroad is that in European Union countries the UK government has decided to continue uprating pensions just like in the UK. This is not the  case everywhere, and those retiring to countries like Australia and Canada have been left fuming at their pensions being fixed.

Meanwhile, the Bank of England and European Central Bank (ECB), whose main responsibility is to keep inflation to 2%, have been rapidly raising interest rates in an effort to control unruly inflation rates. The latest data appears to show some progress on this.

The latest data, released this week, shows that inflation in the eurozone may not be as unruly as we thought. Spain’s inflation is 6.8% (down from 7.3% last month) and France’s inflation rate is 6.2%, so the pension increase is considerably above rising prices. Portugal’s inflation rate is around 9%, so you’ll be marginally better off, but in Italy it is nearly 12%, so you will be worse off.

The good news is that inflation appears to be falling faster than expected, with Spanish prices actually falling in November.

In the eurozone overall, data released this week revealed inflation in the year to November dipped to 10%, from 10.6% in October. It may not seem like a huge drop, but this is the first decrease the area has seen in over a year.

Beware the data (and borrowing costs)

However, there are nuances within the data. Earlier this week, the British Retail Consortium (BRC) pointed out that food inflation hit 12.4% in November. The prices of things like meat, eggs, dairy and coffee all saw considerable price hikes, fuelled by the soaring costs of energy, animal feed and transport. So how affected you are by inflation rather depends on what you buy.

It also depends on whether you’re a borrower or a saver. Because the European Central Bank and Bank of England have raised interest rates, anyone with credit card bills or unfixed mortgages will be losing out there too. And despite inflation starting to fall, several members of the ECB’s interest-rate-setting committee have warned that sharp interest rate rises must continue for now.

That, however, is good news for savers, who will be getting a better return. Interest rates are expected to peak in 2023 at around 5.5% – not bad for savers considering that last year they were 0.1%. So from both a pension and a savings point of view, it’s not a bad time to retire abroad.

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