Five years into the cost-of-living squeeze
Five years after inflation began its sharp climb in August 2021, the cost-of-living crisis has reshaped household finances in ways that only become clear over time.
Sarah Coles, head of personal finance at AJ Bell, notes that average wages and prices increased by about 28% since then. That increase hides a difficult period in 2022 and early 2023, when inflation outpaced pay growth and strained budgets. Public-sector workers fell further behind; at the start of 2022, private-sector wages rose 8.5% over the previous year, while public-sector pay grew just 1.7%. It took until 2023 for public-sector wages to match private-sector gains.
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Retirees on fixed incomes felt the squeeze hardest
Those relying on level annuities faced the biggest challenges. A £10,000 annual annuity in 2021 now has the buying power of £7,770 after inflation climbed nearly 29%. Around four in five annuities sold in 2025 were level, meaning most retirees locked in payments that lost value month after month.
The state pension performed better. It rose from £179.60 a week in August 2021 to £241.30 now—a 34% increase—due to three years of earnings-linked rises that outpaced inflation. Retirees with inflation-linked pensions or drawdown arrangements saw their incomes remain stable, though market fluctuations introduced risk.
Silver lining for new annuities
The crisis brought an unexpected advantage for new retirees. Annuity rates, which track gilt yields, rose alongside interest rates. A healthy 65-year-old with a £100,000 pension pot could secure £4,900 a year in 2021; by August this year, the same pot bought up to £7,800—a 60% increase. Yet only about 10% of retirees choose annuities when first accessing their pensions, preferring the flexibility of drawdown.
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The past five years revealed how inflation affects people differently. Some saw their savings grow while others watched their fixed incomes shrink. The difference between those two outcomes is larger than the headline numbers suggest.
One certainty remains: the next five years will differ from the last.
