Paul Lewis
As Pensions Minister Steve Webb admits, state pensions look set to rise more slowly in future as the Government presses ahead with its plan to change the way inflation is measured.
Currently, pension rises are calculated according to a number of different criteria, one of which is the rise in prices. Traditionally this has been measured by the Retail Prices Index (RPI). But after 2012 it will be replaced by the Consumer Prices Index (CPI) when the Government sets the legal minimum for the annual rise in pensions.
The CPI nearly always shows a lower rate of inflation than the RPI, so the rate of pension rises will inevitably be restricted. This month RPI is expected to be 4.2%, while the CPI is expected to be much lower at 2.8%. A pension of £10,000 a year that was fully indexed to inflation would rise to £10,420 under RPI but only to £10,280 under CPI – a loss to the pensioner of £140.
But the change may not be so easy for some of the 4,000 or so company pension schemes that pay guaranteed pensions governed by their own trust deed – which is the contract between the scheme and its members. If that specifies indexation using the Retail Prices Index, then the law cannot change it.
Written by Paul Lewis, this article was first published in the September 2010 issue of Saga Magazine. Paul's opinions are his own and for general information only. Always seek independent, professional, financial advice.