Advertisement

Bad news on pensions buried in the Budget

Changing the way pensions are increased in line with inflation could cost the average pension scheme member as much as £12,000.

One little-noticed Budget measure could cost some pension savers thousands. The Treasury has confirmed that it is pushing ahead with reforms to change the way in which many people’s pensions go up in line with inflation – and the measure could even be introduced earlier than expected.

At present many occupational schemes increase the pensions they pay members in line with inflation each year. Many either link directly to the retail prices index (RPI) measure of inflation, which typically sits about one percentage point higher than the official consumer prices index (CPI) measure, or make the link on a discretionary basis.

Advertisement - Article continues below

Now, however, the Government is considering scrapping RPI as a measure of inflation altogether, possibly by 2025, even though when these plans were first mooted, 2030 was considered to be more realistic.

For policymakers, the move from RPI to CPI makes sense. They’d rather have a single measure of inflation and most state benefits, pay awards and so on are already linked to CPI. 

However, for current and future pensioners whose annual income is supposed to go up in line with RPI each year, the cost of the switch to the lower CPI rate will build up over time. The trade union Unison reckons it could cost the average pension scheme member as much as £12,000 over their retirement.

The change also has implications for pension-scheme investments, since it will reduce the income paid by the government’s index-linked gilts. Sadly, in many cases, schemes’ savings on members’ lower pension increases will be more than wiped out by lower investment returns.

Advertisement
Advertisement

Recommended

Companies cut back on their pensions bills
Personal finance

Companies cut back on their pensions bills

Britvic is the latest firm hoping a cheaper inflation index will cut pension costs. David Prosser reports.
28 Aug 2019
This landmark pension case could mean big payouts
Pensions

This landmark pension case could mean big payouts

Defined-benefit members in bankrupt firms’ pension schemes could be due a payout after a landmark High Court judgment.
10 Jul 2020
Bank of England sceptical about pension superfunds
Pensions

Bank of England sceptical about pension superfunds

Plans for “pension superfunds”, cleared by industry regulators in recent weeks, could pose a threat to financial stability.
10 Jul 2020
How the pandemic has affected your pension scheme
Pensions

How the pandemic has affected your pension scheme

It’s time to review the effect of Covid-19 on your retirement savings and take any necessary action.
30 Jun 2020

Most Popular

An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Three ideas for Lloyds Bank's new boss
UK stockmarkets

Three ideas for Lloyds Bank's new boss

The Black Horse needs whipping into shape. A change at the top provides a great opportunity, says Matthew Lynn.
12 Jul 2020
Why the moving average is my favourite charting tool
Sponsored

Why the moving average is my favourite charting tool

Traders and technical analysts use "moving averages" to iron out daily fluctuations and give a much clearer picture of a market's direction. Dominic …
13 Jul 2020