RPI Calculation Change Means Millions Will Get Lower Pensions

Documents released with the Chancellor’s Spending Review, but not mentioned in Mr Sunak’s speech, reveal changes to the way payments will be calculated for workplace pensions from 2020 resulting in lower increases.

Many people with defined benefit workplace pensions currently see their pension payments increase each year in line with the rising cost of living (usually RPI but for some with CPI), from February 2030, the way the RPI annual rise is calculated is expected to become less generous.

Women and new retirees will be hit the hardest by the changes.

The value of pensions overtime could be thousands of pounds less than they might have expected.  A 65-year-old may see their total retirement income drop by 4% or 5% compared to what they were expecting.  A 65-year-old women with an average life expectancy may see an average £8,000 drop in income.

State pensions will not be affected by the proposed changes and will rise by 2.5% in April in line with the government’s triple-lock promise.

Had the changes been made earlier investors who buy index-linked gilts (government debt sometimes linked to RPI inflation) would have been hit the hardest.  The Chancellor has decided there will not be any compensation for those affected from 2030. 

Commuters and those paying back student loans could benefit from 2030 when the changes take place.

National statisticians believe the rising cost of living that is calculated using various measures including the Retail Prices Index (RPI) measure of inflation is no longer a valid or reliable measurement.  RPI inlcudes housing costs, CPI does not.

In 2030 RPI will be aligned with a newer measure of inflation called the Consumer Prices Index plus Housing Costs (CPHI) the measure is usually lower than by about 0.8% pa although the gap is currently smaller.

Comment

This leads us to believe that the Government is already planning for a hug increase in inflation over the decade and is protecting both itself from these rises as well as larger company pensions.

Watch our video on how different RPI calculation is done compared to CPI and why we think the Government is long term cost cutting with the RPI change.