State pension to rise by £2.40
Pensioners will see their state pensions increase by £2.40 next year, half the rise seen in April this year.
In his Budget earlier this year, Chancellor Alistair Darling said that the state pension, which is normally calculated using September’s inflation figures, will rise by at least 2.5% next April. However, this is half the rise seen in April this year, when the state pension rose by 5% - the biggest increase since 2001.
Despite inflation slumping to a five-year low during September, this 2.5% rise means single pensioners will see their weekly income increase from £95.24 to £97.65 from next April.
Pensioner couples, meanwhile, will receive £156.15, up from £152.30.
This is the second time the government has used the 2.5% underpin, which was first introduced in 2001.
“Last year, pensioners got lucky because September 2008 was a high water mark for inflation,” says John Ball, head of defined benefit pension consulting at Watson Wyatt. “This time, the opposite could be true but the basic state pension will still go up by £2.40 in April 2010.”
However, while the fact that the state pension will rise despite inflation actually treading water in negative territory this September, the 2.5% rise has still come under criticism.
Shona Dobbie, head of the Alliance Trust research centre, which carries out research into the real rate of inflation based on age, says the cost of living has fallen for older people because of lower utility and food bills.
But she adds: "We are wary that the sharp drops that we have seen in both utilities and food prices may prove to be temporary and that the elderly may enjoy only a brief respite before their inflation rate begins to rise again.”
With VAT due to return to 17.5% at the start of next year, the cost of living could have risen significantly by the time the state pension increase is introduced.
“By the time we get to April 2010, falling prices could be a distant memory,” says Ball. “Prices have increased by 2.5% in the last eight months and it’s only because the headline figures look at changes over a full 12 months that inflation is negative.”
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
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).
Defined benefit pension
Often referred to as a “final salary” pension, benefits paid in retirement are known in advance and are “defined” when the employee joins the scheme. Benefits are based on the employee’s salary history and length of service rather than on investment returns. The risk is with the employer because, as long as the employee contributes a fixed percentage of salary every month, all costs of meeting the defined benefits are the responsibility of the employer. (See also Final Salary).