Latest government proposals to link private pension income to the Consumer Prices Index will increase the negative effects of inflation on pensions, says Mallowstreet, a leading panel of pension industry experts.
Previous proposals had been to link both state and personal pension incomes to the Retail Prices Index (RPI), which generally rises faster than the Consumer Prices Index (CPI) and therefore provides a better safeguard against inflation. In recent years, the CPI has generally risen 0.7% per year less than the RPI.
In the next 5 years the gap between the two indexes is expected to be higher, and 1.2%, according to calculations by the Office for Budget Responsibility.
The CPI link was first proposed for state pensions, but the Department for Work and Pensions has claimed that it is appropriate and consistent to take the same approach for private pensions.
Because pensions are a long-term investment, the differences in the rates are magnified over time. Mallowstreet estimates that pension incomes linked to the CPI could be worth up to 25% less than pension incomes from private pensions linked to the RPI.
The Government now proposes to use the CPI as the index for linking increases in the basic state pension, state benefits, and large public sector pension schemes. This will lead to huge savings in the Government’s pension costs, it will considerably deplete pension savings and pension income from pension schemes.
Mallowstreet has now written to the government asking for a full consultation period, before the proposed changes go ahead.
