Inflation tinkering could hurt pensioners

9 November 2011

A tweak to the way the cost of living is measured for decisions about state pension and benefits levels could lead to a poorer retirement for everyone.

The record-breaking high inflation figures released in September grabbed the attention of most of us, but it was the Treasury that paid closest attention.

September's inflation figures (as measured by the consumer price index or CPI) are used by the Treasury to measure the cost of living and traditionally pensions and benefits are increased in line with September's figure the following April.

This September, CPI hit 5.2% - the highest level it has ever reached. If the government were to raise state benefits in line with that figure, the Treasury would need to find around £1.8 billion more than it had planned for.

Cost of living

As we all know, the government is skint. So rumours are already circulating that it is going to tweak the way it measures the cost of living in order to save some cash. The Prime Minister's official spokesman fuelled concerns in September when he said that an 'actual decision' on the way the increase is worked out will not be made until later in the year.

According to reports, the government is now planning to find a new way of measuring inflation for 2012's increases. One option under consideration is to use an average figure for 2011, which would save the government around £1.5 billion.

Initially, this would only result in a small change for pensioners – the current average is 4.4% so pensioners would see their pensions rise by £4.49 per week in April, rather than the £5.30 they would have got if the September inflation figure was used. But the problem comes in future years when the reduction would be compounded with years of smaller increases.

Five solutions to the pension crisis

Feeling the effect

Pensioners are already feeling the effects of inflation more than most. Different spending patterns across the age groups mean we are all affected differently by inflation depending on our age.

Pensioners are facing a rate of inflation of around 7% because a greater proportion of their money is spent on heating and food – items that have seen huge price increases in recent years.

The secondary problem for pensioners is that many don't have inflation-linked annuities so the spending power of their income is falling every year – a problem that is compounded by rising life expectancies. A recent study by Standard Life revealed that a 90-year-old today who retired in 1981 with a £10,000 a year income will have seen the purchasing power of their income fall to just £3,207 over the past 30 years.

In the current climate, the last thing pensioners need is the government tinkering to reduce state pension increases.

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