Interactive Investor

State pension to rise, but private ones won’t grow as fast

26th November 2020 13:30

Laura Miller from interactive investor


Share on

The chancellor gives with one hand but takes with the other in latest Spending Review.

Retirees have received mixed messages from Chancellor Rishi Sunak, with the state pension set to rise but private pensions on course to become much less generous.

State pensioners can breathe a sigh of relief after the government yesterday confirmed it will honour a pre-election pledge to keep the state pension triple lock.

Yesterday’s Spending Review guaranteed these payments would increase by 2.5%, far exceeding price and earnings inflation.

There had been speculation the triple lock would be dropped to help pay for the Covid-19 emergency support measures, such as the furlough scheme.

Rebecca O’Connor, head of pensions and savings at interactive investor, said: “It’s important to bear in mind that’s a rise for all of us who will receive it one day – and the likelihood of people depending on it will rise too, as defined contribution pots, at 8% minimum contributions over a working life, are unlikely to cut the mustard for enough retirement income.”

However in less welcome news for pensioners, the chancellor confirmed changes to the retail price index (RPI) measure of inflation that will make it more like the consumer prices index excluding housing (CPIH).

This matters because it affects the way that any pensions linked to RPI are calculated. RPI is normally 08% higher than CPIH.

However, the change will be delayed until at least 2030.

The Association of British Insurers estimates the move could cost investors and pensioners £122 billion, with retirees hit particularly hard.

The Pensions Policy Institute found nearly two-thirds of private sector defined benefit schemes currently increase pension benefits in line with RPI. It also calculated the shift in 2030 would cost the average man £6,000 and the average woman £8,000.

It is also bad news for those whose pension or annuity income is increased based on the current RPI formula.

Ian Mills, partner at pension consultancy Barnett Waddingham, said: “Pensioners will be the big losers, but most won’t feel it for many years. Starting from 2030, this will result in a slow, steady erosion of their incomes, compared to what they might have otherwise reasonably expected. 

The chancellor has introduced ‘exponential decay’ into the UK pensions system, he added, “meaning over many years those with RPI-linked pensions will slowly, but surely, become poorer than before today’s announcement”.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Get more news and expert articles direct to your inbox

Sign up for a free research account to get the latest news and discussion, and create your own virtual portfolio.

Free Sign Up