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

Sterling crashes to its lowest since 1985 after mini-Budget
Currencies

Sterling crashes to its lowest since 1985 after mini-Budget

The pound has fallen hard and is heading towards parity with the US dollar. Saloni Sardana explains why, and what it means for the UK, for markets and…
23 Sep 2022
Earn 3.7% from the best savings accounts
Savings

Earn 3.7% from the best savings accounts

With inflation topping 10%, your savings won't keep pace with the rising cost of living. But you can at least slow the rate at which your money is los…
23 Sep 2022
Three top-notch Asian stocks to buy
Share tips

Three top-notch Asian stocks to buy

Professional investors Adrian Lim and Pruksa Iamthongthong, managers of the Asia Dragon Trust, pick three of their favourite Asian stocks to buy now.
23 Sep 2022
How to use Section 75 credit card protection for your purchases
Credit cards

How to use Section 75 credit card protection for your purchases

Your credit card can give you extra protection when the goods or services you purchase fall short of your expectations. Ruth Jackson-Kirby explains ho…
23 Sep 2022

Most Popular

Paypal, bitcoin, and the weaponisation of money
Bitcoin & crypto

Paypal, bitcoin, and the weaponisation of money

Recent events have shown how both business and governments can “weaponise” money and shut down dissent. What to do? Buy bitcoin, says Dominic Frisby.
22 Sep 2022
Why we should abolish stamp duty – the worst tax in Britain
Tax

Why we should abolish stamp duty – the worst tax in Britain

Stamp duty is Britain’s most horrible tax. We should forget cutting it and abolish it altogether, says Merryn Somerset Webb.
22 Sep 2022
What we know and what to expect from Kwasi Kwarteng's mini-Budget
Budget

What we know and what to expect from Kwasi Kwarteng's mini-Budget

New chancellor Kwasi Kwarteng is to deliver a “mini-Budget”. Nicole García Mérida explains what we can expect to see.
22 Sep 2022