Pensioners could lose out on £10,000
Tomorrow, the average pensioner will find out if they are to lose out on nearly £10,000 during retirement, according to Hargreaves Lansdown.
The Office for National Statistics (ONS) has been consulting on whether to change the way the retail prices index (RPI) measure of inflation is calculated to bring it more in line with the consumer prices index measure.
The changes being considered would result in the index - which private sector pensions are linked to - rising more slowly in future.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says: "This kind of change could prove to be the most damaging of stealth attacks on pensioner incomes.
"It appears innocuous but, over an entire retirement, it can slowly deprive pensioners of thousands of pounds."
Savers and investors could also lose out if the ONS decides to implement the proposed changes because RPI affects the value of inflation-linked savings certificates and index-linked bonds, or gilts, issued by the government.
Moneywise will keep you informed of tomorrow's decision.
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.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
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).