Interactive Investor

Pension savers could lose £150,000 in government inflation switch

20th August 2020 12:37

Laura Miller from interactive investor

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Defined benefit pensioners stand to lose out and are urged to respond to consultation closing this week.

Millions of pension savers face losing around £150,000 each in retirement because the government plans to change the measure used to grow their nest eggs.

The government plans to reform the retail prices index (RPI) measure of inflation to align it with the rival consumer prices plus housing costs (CPIH) index. 

This reform will affect anyone with assets which have a value or return affected by RPI, in particular defined benefit, or ‘final salary’, pension schemes, which normally rise in line with the inflation metric.

The problem is that RPI is normally much higher than CPIH and the move would restrict increases in these pension payments.

A consultation on the issue closes this week, giving final salary pension holders until midnight on Friday to voice their protest against the move. 

Official statisticians have already decided to get rid of RPI from 2030, but the government is deciding whether to allow this to happen five years earlier.  

Pensioners with a final salary scheme could receive up to 9% less overall from their pension under the planned change, according to the Pension Policy Institute (PPI).

This would mean an average drop for women aged 65 in 2020 of around £158,000 to
£144,000 over their lifetime, if the reform is introduced in 2025 as intended, the PPI calculated.

Women and younger pensioners will see the greatest reduction, as women live longer than men, on average, while younger pensioners will experience a compounding effect. 

Older pensioners on low incomes will also struggle with a reduction in benefits as they have less opportunity to make up income deficits than younger members.

For example, taking a part-time job is less viable in later years.

Steve Webb, partner at pension consultancy Lane, Clark and Peacock and a former pensions minister, says: “This decision could have a very big impact on pensioners who worked in the private sector and whose pensions in retirement generally rise in line with RPI.   

“As the proposed replacement for RPI is generally around 1% lower per year, and with a typical retirement lasting more than 25 years, pensions received in later life could end up more than a quarter lower than if inflation measures were left unchanged.  

“Those who feel strongly about this issue should respond as a matter of urgency before the consultation closes”.

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