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.

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