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.

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.

Recommended

Suspending your pension contributions? Remember the magic of compounding
Pensions

Suspending your pension contributions? Remember the magic of compounding

Think very carefully before suspending your pension contributions, or you will miss out on compound interest – the “eighth wonder of the world”.
12 Jan 2021
Shop around to secure the best Sipp
Self invested personal pensions

Shop around to secure the best Sipp

If you’re one of the growing number of savers with a self-invested personal pension (Sipp), make it a new year’s resolution to check you’re getting va…
11 Jan 2021
Scammers target pension transfers
Pensions

Scammers target pension transfers

People who apply to transfer their defined-benefit pension to another pension provider need to be on their guard against a proliferation of scammers.
18 Dec 2020
Compensation claims grow after guaranteed minimum pension payouts fall short
Pensions

Compensation claims grow after guaranteed minimum pension payouts fall short

Some defined-benefits pension schemes have paid the wrong amount of “guaranteed minimum pensions”, leading to a growing number of compensation claims.
18 Dec 2020

Most Popular

Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021
Leasehold reforms promise the end of a nightmare for many homeowners
Property

Leasehold reforms promise the end of a nightmare for many homeowners

Horror stories about unscrupulous landlords profiting from a legal relic of the feudal era are about to get a happy ending, says Simon Wilson.
16 Jan 2021
Free 6 issue trial then continue to