Basic state pension set to increase

14 October 2008
The news that inflation exceeded the 5% mark in September should benefit pensioners receiving the basic state pension.

Official figures show the Consumer Price Index (CPI) – the official measure of inflation – hit 5.2% last month while the Retail Prices Index (RPI) – which includes mortgage repayments – stood at 5%.

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.”

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