You are here: Home - Retirement - Retirement planning - News -

Stealth cut to pensions if government switches measure of inflation

0
Written by: Paloma Kubiak
15/01/2020
Retirees could see a big dent in their pensions and investors in index-linked gilts could see the value of their holdings tumble if the government adopts a new headline measure of inflation.

The government has confirmed it will launch a consultation on aligning the Retail Prices Index (RPI) with the Consumer Prices Index including owner occupiers’ housing costs (CPIH) in the March Budget.

The consultation, which was due to start this month but has been delayed, follows calls by statisticians and politicians to use one single, more accurate measure.

Currently, the government uses a mix of inflation measures – RPI, Consumer Prices Index (CPI) and the newer CPIH – for different policy areas.

Because RPI tends to be higher than both CPI and CPIH, jettisoning RPI in favour of CPIH could have far-reaching implications for savers, investors and consumers, according to Tom Selby, senior analyst at AJ Bell.

“There are, for example, defined benefit schemes where scheme rules mandate members’ retirement incomes rise in line with RPI. If these contracts were ripped up and RPI replaced with CPIH – which tend to be lower – it would effectively represent a stealth cut to people’s hard-earned pensions,” Selby said.

“Anyone invested in index-linked gilts – including individuals and pension funds – would see the value of their holdings tumble if the government applied a blanket overnight switch from RPI to CPIH.”

However, for students and commuters, a move away from RPI to CPIH could boost cash in pockets. This is because the higher inflation measure is used to help set rail fare increases and student loan repayments so switching to CPI means cheaper travel and lower interest rates for student debt.

In an earlier letter to the chairman of the Economic Affairs Committee, Chancellor Sajid Javid wrote: “There would be significant effects of the UK Statistics Authority’s approach for users of RPI and the authorities do not know the full extent of the effects. Given this it must be appropriate that the private and public sectors, household, firms and financial markets will need substantial time to prepare.

“Therefore, I am unable to consent to the introduction of the change UKSA have proposed any earlier than February 2025. To ensure better information about the potential effects, the government will consult publicly on whether the change should be made at a date other than 2030, and if so, when between 2025 and 2030.”

‘Far reaching implications’

Selby said: “The big question the government needs to answer is the extent to which it will mitigate any negative impact on people with pensions and investments explicitly linked to RPI. One option in this regard would be to maintain a notional RPI which these contracts could then adopt, although this might mean RPI remains part of the system for decades.”

He added that the government rather cynically tends to use the lower CPI measure when it comes to spends and the higher RPI when it comes to getting money from the public.

“Conversely, the state pension, benefit payments and tax thresholds have been linked to the lower CPI measure, leading to accusations of ‘index shopping’ by successive administrations.

“Moving away from RPI to CPIH could precipitate an end to this approach and provide a much-needed boost for indebted students and rail passengers,” he said.

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Thousands overpaid through government self-employment grant

Thousands of people in receipt of the government’s Self-employment Income Support Scheme (SEISS) have been ove...
Thousands overpaid through government self-employment grant

Nurses to be offered ‘earn and learn’ route

A new government package worth £172m will help to train thousands more nursing degree apprentices.
Nurses to be offered ‘earn and learn’ route

Student loans thresholds to rise for most borrowers from April

The government has released its annual update to the interest rates and thresholds of income contingent studen...
Student loans thresholds to rise for most borrowers from April

Ryanair jetting towards US flights for £10

Ryanair is on course to achieve its long-held ambition of offering transatlantic flights to the US – and the...

Investing in car parks: a good vehicle for income seekers?

As the search for income continues, many investors are turning to alternatives, with car parks becoming increa...

A quick guide to guarantor loans – in association with Guarantor Loan Comparison

Considering a guarantor loan or becoming a guarantor yourself? Read our essential guide...

Results round-up: Companies to watch this week

Mulberry and more will face the music this week.

Product launches of the week

Select Property Group, Schroders, Leeds Building Society and more have exciting news this week.

Money Tips of the Week

Read previous post:
Number of inflation-beating savings accounts soars, but still dodge the high street

Today’s announcement that inflation dropped to a three-year low in December will be welcome news for savers.

Close