Basic state pension set to increase
The news that inflation exceeded the 5% mark in September should benefit pensioners receiving the basic state pension.
These figures have a number of implications for pensioners, not least that the basic state pension could increase accordingly.
The government updates the basic state pension people receive each April, as the start of the new tax year, usually in-line with the previous September’s RPI rate. According to Watson Wyatt, if the government follows its usual updating trend, single people will see their basic state pension increase from £92.25. to £95.25 Couples, meanwhile, should see their payments increase from £145.05 to £152.30.
This will be the biggest increase in both percentage and cash terms since 2001, when the basic state pension was increased by £5 a week following criticism of the previous year’s measly increase of 75p.
The increase will be welcomed by the majority of pensioners, many of whom are estimated to be struggling with personal inflation levels of 9.2% for a single male pensioner, 9.1% for a single female pensioner and 7.7% for retired couples.
And with inflation forecast to fall sharply next spring, the increase in the basic state pension could have an even more positive effect on many pensioners.
John Ball, head of defined benefit consulting at Watson Wyatt, says: “If inflation peaked in September, this is good news for pensioners but bad news for the government. Just like companies who pay inflation-linked pensions, the government will have to pay out more if there prices swing upwards at the wrong time of the year.”
Of course, there is no legal obligation on the government to increase the basic state pension in-line with earnings or prices. The current government has previously argued against being required to take these factors into account when resetting weekly basic state pension payments.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says: “This rate announcement should be good news for pensioners, particularly as there are strong indications that inflation will be falling off by next April. A possible risk for pensioners is that the current pressure on government finances might prompt the chancellor to hold back some of this rate increase.”
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).