Friday, December 2, 2011

Pensioners to lose thousands after inflation measure change

Members of company pension schemes face losing tens of thousands of pounds in retirement income under changes to an inflation measure.

Someone retiring with a private pension worth £10,000 will lose out on almost £20,000 of pension income, new figures suggest.

The loss arises for occupational pension schemes that have switched their annual increases in pension payments from the RPI measure of inflation, which includes housing costs, to the lower CPI measure, which does not. Figures this week show the gap between the CPI and RPI inflation rates is larger than previously thought.

That means the cost of the switch to pensioners is even greater.

Previous Government estimates suggested that over the coming decades, RPI will exceed CPI by 0.87 percentage points. But the Treasury’s Office for Budget Responsibility this week said the “wedge” would be higher at 1.4 points.

Because of the incremental effect of annual rises, that small statistical change can make a substantial financial difference over the typical 21-year retirement. Someone bowing out with a pension income of £10,000 can expect to receive total payments of £272,989 over their retirement if their income grows in line with CPI inflation of 2 per cent. more