Chancellor slashes 10 million pensions and nothing happens!

Over 10 million people could lose an average of £73,000 each in retirement if their annual pension increase is currently linked to the retail price index.   This is because Chancellor Rishi Sunak has backed the request made by the UK Statistics Authority for the country to ditch RPI and use a version of the consumer price index that includes owner-­occupiers’ housing costs, known as CPIH. 

How this can happen without barely whimper amazes me.  There’d be outrage, protests in the street, questions in parliament if it happened to any other group in society.

Millions of defined benefit pension savers will see their future retirement incomes slashed after Sunak pressed ahead with a change in the way that inflation is calculated.  The difference between how the two indices are calculated has meant RPI has been one percentage point higher than CPIH on average.

Switching to the lower measure would therefore significantly reduce the amount of income that members of “final salary” pension schemes receive. Annual pension payments are routinely upgraded by RPI.

Private sector benefit pension scheme members will be the most affected – yes it’s the private sector not public that suffers again – as their annual income will be uprated by a lower figure each year from 2030. Anyone looking to transfer their defined benefit pot into a more flexible personal pension will now find their transfer value has fallen.

Jos Vermeulen, of Insight Investment, said anyone with a pension linked to RPI would see an immediate drop in the value of their pension pot. He added: “It is terrible news for millions of pensioners and companies that have done the right thing.”

Pension schemes could also be affected as they will have to pay out CPI-linked increases but may have bought RPI-linked bonds to help pay for future pensions. This mismatch could cause a funding issue. Pensioners living off annuities will also be affected if their annuity is “index-linked” and is currently uprated by RPI. Standard annuities, however, do not increase every year.

Those in the civil service pension scheme will not be affected, as pensioners have only been paid CPI-linked increases since 2011. In 2030 the RPI measure of inflation will effectively be scrapped and the Chancellor said losers from the changes would receive no compensation. By then, the inflation rate will be fully aligned with CPIH.

Your pension income will slowly and steadily be eroded from 2030, compared with what you otherwise would have received. Between now and 2030, nothing will change.

Ian Mills of Barnett Waddingham, a consultancy, said pensioners would be the big losers but most would not feel it for many years. He said: “The Chancellor has introduced ‘exponential decay’ into the pensions system.

This is arguably the biggest and cleverest stealth tax of all time, with the Chancellor managing to trump even Gordon Brown’s 1997 raid on pension funds.”

Alex Waite of consultancy LCP said that although the new measure of inflation might be only between 0.5 and one percentage points lower per year, it could mount up over decades.

He said: “We estimate that a typical 65-year-old woman will see her overall pension end up 15pc lower under the new measure than if RPI had been retained; for a man it would be 14pc.”

For a pension that was due to pay £10,000 per year, the income could end up £1,500 lower than it would have otherwise been. A 70-year-old man would see his total pension drop by 11pc on average, and a woman 13pc.

There is nothing that can be done to prevent the fall in future income, according to Mr Vermeulen, who said pensioners would slowly but surely become poorer as a result of the changes.

Published by brianjonesdiary

Dad, husband, brother and son. Interested in travel, politics, sport, health and much more. Semi-retired and aiming to making the most of life as I approach my sixth decade.

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