Rising inflation offers state pension boost

Wednesday, October 19th, 2011

State pension payments will rise by 5.2% in April 2012 in line with September’s inflation figure, as measured by CPI.

But critics of the government’s decision to adopt the lower measure of inflation, rather than RPI, for the uprating of the basic and joint state pension claim it will take millions out of pensioners’ pockets.

The September CPI figure of 5.2%, the highest since September 2008, means the basic single state pension will increase by £5.31 to £107.46 a week from April 2012, while the joint state pension will increase by £8.49 to £171.84.

But if the state pension rises were still based on RPI, which rose from 5.2% to 5.6% in September, the single state pension would have been £108.42 and the joint pension would have been £173.36.

Dot Gibson, general secretary of the National Pensioners’ Convention, criticised the government for adopting the lower measure of inflation for the uprating: “All the research shows that the real level of inflation pensioners face is at least double the official figures, because older people spend a higher proportion of their income on those goods that are rising fastest.

“It is time the government relinked the state pension to the RPI and investigated the need for a pensioner price index that truly reflects the real costs of living for Britain’s retired generation.”

Dave Prentis, general secretary of Unison, added: “The move from RPI to CPI to calculate pensions inflation will take millions out of pensioners’ pockets – just as we need people to be spending to kick-start our flagging economic recovery.”

Employment benefits such as jobseeker’s allowance are also calculated using the September CPI rate, meaning it will increase by £3.51 to £71.01 a week.

From April 2012, the allowance on Isas will also rise in line with inflation for the first time. Savers, who can currently invest up to £10,680 a year in the tax-free accounts, will see the annual allowance rise by £600 in line with RPI.

However, older savers who are looking to derive an income from their savings will, according to Moneyfacts, be hard hit by the September figures.

It says that to beat inflation a basic rate taxpayer paying 20% tax needs to find a savings account paying 6.5%, while a higher rate taxpayer at 40% needs to find an account paying at least 8.67%.

Taxpayers have a choice of just five inflation-tracking accounts, while there are no regular accounts that beat inflation in today’s savings market.

Sylvia Waycot from Moneyfacts said: “The rate of inflation means hundreds of thousands of savers need accounts paying an unattainable 6.5% before they earn a real rate of return on their money.

“Anything less means they will fall into ‘the eroding spending power trap’ which has already wiped almost £700 off the spending power of £10,000 in just five years.”

September’s 5.2% figure will be used to determine rise in state pension and other benefits in April 2012