Pensions Suffer as Consequence of RPI Fall

The government have predicted that the Retail Price Index will show a year on year drop by the autumn, of up to 2%, which will affect the annual rate of personal pensions.

Were this to happen, some providers have said that they will reduce the payments on index-linked pension annuities.

Despite the fall, the government are promising that the basic state pension will rise by at least 2.5% even if the year-on-year prices fall.

Tom McPhail of financial advisors Hargreaves Lansdowne had the following to say about which pension annuities would be cut if inflation falls below zero.

“Axa, LV, Partnership, some of Standard Life’s annuities, some of Prudential’s annuities – these companies have said if RPI goes negative and you have one of these annuities, then your payment will go down.”

He added that others will not make the cut: “Norwich Union, MGM, and Legal and General have said your payments wouldn’t go down, they would just stay flat until RPI went back up above where it was before.”

Effects Will Start to Show Sooner Rather Than Later

It is thought that the Retail Prices Index may go negative as soon as March, which may affect some people very quickly.

Mr McPhail added that: “Generally annuity providers use the RPI figure three months before you took the annuity out. So if they go down this month that will affect people who took their annuity out in June last year.”

For those with state pensions, the news isn’t as bad.

State pensions are linked to Septembers RPI, and though the government has predicted that the RPI will fall to below minus 2% in the third quarter of 2009, they have also said they will not raise state pensions by less than 2.5% in April of next year.

However, they are not making such promises for people with Child Benefit, Jobseekers Allowance or Disability Benefits. If the annual rate of prices falls, these benefits will be frozen.

Another thing that will freeze if prices continue to fall is company pensions paid to retired workers from the public sector.

Tom McPhail said: “The odd one could [be cut] but it would save them very little money and upset a lot of people. So with a company pension you’re probably OK.”

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