RPI Changes Mean DB Pension Income To Fall Up To 21pc

Members of pension schemes and annuity holders could see their values fall due to a technical change into the way the Retail Prices Index (RPI) is going to be calculated.

The resulting accumulated pension payments overtime may see a fall of up to 21% in Defined Benefit (DB) incomes according to research.

The government is looking to change RPI (a measure that many pension payments increase by) to the Consumer Prices Index including owner occupiers housing costs (CPIH) between 2025 and 2030 as it is, allegedly, a more accurate inflation measure.

According to Insight Investment, RPI rises around 0.75% a year more than CPIH.  This means lifetime pension payments will drop between 10% and 15% for someone buying an RPI linked annuity or has a defined benefit pension with RPI increases at the age of 65.

A yearly average DB income for a 65-year-old with a life expectancy of 86, in 2020 would be around £6,300 per annum.  This could fall to £5,200 per annum if the change took place from 2025.

A yearly average DB income for a 65-year-old with a life expectancy of 88 would be around £6,200 per annum.  This could fall to £5,000 per annum if the change took place from 2025.

The Pensions Policy Institute (PPI) wants the Government to continue to calculate RPI for existing contracts and that people receiving their benefits today can still use the current calculations.

Comment

One rule for government and regulators, another for consumers and advisers.  We wonder if the FCA will allow advisers to take this fall into account when advising on pensions transfers.