In his time as chancellor, Rishi Sunak enacted a number of changes to the British financial system, including freezing key tax thresholds and introducing the furlough scheme during the pandemic.
One lesser-known move was Sunak’s proposal to change the definition of the key UK inflation measures, the Retail Prices Index (RPI). The proposal, after a request from the UK Statistics Authority, centres around the government’s plans to align RPI with the Consumer Price Index including owner occupiers’ housing costs (CPIH) no earlier than February 2030.
It may seem like an innocuous change, but the potential impact on pensions has resulted in industry titans BT, Ford UK, and Marks & Spencer beginning a judicial review against Sunak through the Royal Courts of Justice.
The review is looking at whether the UK Statistics Authority (UKSA) and the Chancellor have the power to change RPI in this way and whether they properly applied their powers.
RPI normally results in a higher figure than CPIH
Owing to the different calculation methods, RPI is expected to result in higher inflation figures than CPIH.
For example, in July 2022 the Office for National Statistics reported that the RPI stood at 11.8% while the CPIH stood at 8.2%.
Industry experts have previously warned that the reforms could cost savers and investors up to £122 billion and impact up to 10 million members of defined benefit (DB) schemes, whilst also leaving pension schemes around £80 billion worse off.
Now, Sunak has put the wheels in motion to reform the RPI calculation, moving to the CPIH measure from 2030. On the surface of things, modifying the way the RPI is calculated may seem like a positive move, as the current method for calculating the RPI has been widely criticised in the past.
However, the change arguably worsens the funding positions of many well-run pension schemes and resulted in lower incomes for those on RPI-linked pensions. So, BT, Ford UK, and Marks & Spencer are taking legal action in an attempt to reverse the decision.
Many pension schemes would benefit from a reversal of the decision – as they would expect their inflation-linked gilt holdings to appreciate whilst their CPI-linked pensions would be unaffected. This could meaningfully improve funding positions.
A shift in the RPI could also cut thousands off the final salary pension value for future retirees as many pension schemes where RPI is used to calculate any increase in your benefits each year.
According to a Money Marketing report, affected pensions could have their growth cut by between 4% and 9% over the course of their lifetime. What’s more, the report claims women will be worse off on average, as women’s life expectancies are higher than men’s overall.
Concerningly, this move is set to affect thousands of pensioners up and down the country. The complainants say that “this affects approximately 82,000 members of the [BT] scheme alone and the decision will wipe £2.8 billion from the aggregate present value of their pensions”.
So, if the legal action taken against Sunak is unsuccessful, your final salary pension value could rise more slowly from 2030. This change may result in an overall reduction in income compared with your pension growing in line with the current RPI measurement.
2 key examples of how your pension could grow if the decision is reversed
As of August 2022, it is yet unclear whether Sunak’s move to change the way the RPI is calculated will go ahead, though industry commentators expect the government to be successful in their defence.
If the government is unsuccessful in implementing the change, your pension could benefit from further growth in the coming years.
Professional Pensions provides two examples of how a pension holder’s investments could yield better returns if the RPI measurement remains the same:
- A 65-year-old retiring today with an annual RPI-linked pension of £5,000 will ultimately gain around £15,000 over their lifetime.
- A 55-year-old retiring in 10 years’ time with an annual RPI-linked pension of £5,000 would gain approximately £32,000 over their lifetime.
So, if you have significant pension wealth and already have plans in place to fund your retirement, a reversal of Sunak’s RPI shift could be hugely beneficial for you.
However, if Sunak’s decision to reform the RPI is enshrined into law, it could significantly affect your future pension income.
Working with us can help review your pension wealth and prepare for any ramifications of the change to the RPI measurement.
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A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.