Wealth

Pensioners braced for income hit from inflation change

Pensioners will lose out from plans to change the measure used to determine the state pension. But they now look likely to be hit again by proposed changes to inflation measures

The Office for National Statistics (ONS) has started a consultation on how the retail price index (RPI) is calculated – RPI is a measure of inflation based on a basket of goods including mortgage payments

The government has already announced plans to change the way it calculates increases in the state pension. State pension rises are currently linked to RPI, but will in future they will be linked to the consumer price index (CPI), which does not take into account mortgage payments and therefore rises more slowly

This means that the state pension and other benefits will not increase as quickly

RPI to be brought into line with CPI

The consultation will now look at changing the way RPI is calculated to bring it more in line with CPI, meaning it will rise more slowly

Since 1996 there has been a 0.9% difference in the RPI and CPI measurements, although the difference is currently less as CPI stands at 2.5% and RPI at 2.9%

Options the ONS is looking at for RPI include partial changes to the formula, which would close the gap with CPI slightly, or changing the formula completely to bring it more in line with CPI

What this means for your pension

Any change in the formula would affect private sector pensions as well as the state pension. Retirees currently taking a pension from their employer that is linked to inflation will receive a reduced pension if RPI is reduced

Even if your pension income is not linked to inflation, pension funds are heavily invested in inflation-linked investments and would receive lower returns if RPI measurements are changed

A reduction in RPI would also cut returns on the £18 billon invested in inflation-linked NS&I policies

Darren Philip, director of policy at the National Association of Pension Funds, said: ‘Pension funds are major investors in government debt and changes to index-linked bonds could have far reaching impacts on those investments. It could also alter the amount by which pensions being paid to former workers are increased each year.’

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October 17, 2012

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