I’m 68 and currently receive an annual defined benefit (DB) pension worth about £20,000 a year. At the moment it goes up in line with RPI inflation. Will this be affected by the Government’s decision to scrap RPI from 2030? Anna

Tom Selby, AJ Bell Senior Analyst says:

Documents published alongside chancellor Rishi Sunak’s Spending Review last week confirmed long-trailed plans to effectively replace the Retail Prices Index (RPI) inflation measure with a version of the Consumer Prices Index that includes housing costs (CPIH).

This is happening because RPI has been deemed an inappropriate measure of cost of living increases by the UK Statistics Authority. It is estimated that, on average, RPI overstates inflation by around 0.8 percentage points every year.

The change will occur from 2030 (statisticians wanted to bring it in earlier but the chancellor refused) and will impact savers and investors in a number of ways.

In your case, it is likely the RPI-linked increases in the value of your pension are written into the terms of your contract. This means that, from 2030, the value of these increases will likely be lower on average as a result.

It’s probably easiest to illustrate this with an example. Take someone who has a £20,000 annual pension which is linked to RPI. Over the course of a 30-year retirement, if RPI rose by 2.8% a year they would have received a total income of £947,000.

However, if instead it rose in line with CPIH at 2%, over the same 30-year retirement they would receive a total income of roughly £828,000.

This means a simple switch from RPI to CPIH could cost someone in this position £119,000 in lost retirement income.

While lower annual increases in the value of your pension are not ideal, remember you still have a valuable guaranteed pension that is protected against inflation. It’s just that up until 2030 you’ll likely enjoy an annual uplift in the real value of your retirement income, whereas post-2030 your spending power will be maintained.

UK GILTS AND ANNUITIES

Investors in UK gilts, which currently rise in line with RPI, will also see the value of those investments fall from 2030.

As DB pension funds are big investors in these financial instruments, some will likely need to find extra cash in order to pay retirement incomes to their members.

Where DB members have yet to reach their scheme’s retirement age and the rules promise RPI-linked increases, the value of that pension promise is likely to reduce, meaning the amount of money they might be offered to transfer out (known as the ‘Cash Equivalent Transfer Value’) could fall as well.

Finally, anyone who has bought an annuity – a guaranteed income for life paid by an insurance company – with RPI-linked inflation should expect to see these increases reduce from 2030 onwards.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to editorial@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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