Rishi Sunak confirms £96billion blow for pensions and investments

CHANCELLOR Rishi Sunak has today confirmed a change to how pensions and investments are calculated that could cost savers up to £96billion.

The announcement was left out of the government's official Spending Review, but instead snuck out in some background documents.

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The documents state that the Retail Price Index (RPI) - one of the ways that we calculate inflation increases for financial products - will be scrapped after 2030.

Over six million Brits will be affected by the move, with pensions savers and investors hardest hit, losing out on billions of pounds.

Andrew Megson, executive chairman at My Pension Expert, said: “All eyes have been on the Spending Review and how the Chancellor plans to recoup some of the money spent on the COVID-19 rescue packages.

"However, away from the limelight of his speech, it has been confirmed that the RPI will be reformed from 2030 to align with the CPIH."

What is RPI and how does it affect my finances?

The UK has several main methods to measure inflation including RPI, the Consumer Prices Index (CPI) and the Consumer Prices Index including owner occupiers' housing costs (CPIH).

Because the measures are calculated differently, CPIH tends to be about 0.8% lower than RPI.

Different financial products use different measures and which one is chosen can have a significant impact on your finances.

The government itself uses the measures in lots of different ways - often linking the things we pay for, such as rail prices and alcohol duty, to the higher RPI measure.

Tom Selby, senior analyst at AJ Bell, said: “The Government has doggedly, and some would say cynically, continued to link things like rail fare increases and student loan repayments to RPI, ensuring a quiet and creeping boost to Treasury coffers."

At the same time, the Treasury tends to link its own spending, for instance on benefits and the state pension, to the lower CPIH calculations.

On paper, that means scrapping the RPI looks like good news, as the cost of everyday items such as train tickets, flight tax, car tax, tobacco and alcohol duty and mobile phone tariffs should all rise more slowly.

But experts are warning that there are significant costs associated with making the switch and that pensions savers will bear the majority of them.

The National Statistician, Professor Sir Ian Diamond, said: “The RPI is not fit for purpose and we strongly discourage its use."

How much will pensions lose if RPI is axed?

The government has previously calculated that it would save around £90billion from axing the RPI, this takes into account the amount that it will save on pensions and investments as well as the amount it will lose from consumer spending.

Sarah Coles, personal finance specialist at Hargreaves Lansdown said: “This is a horrible blow for pensioners, who will pay the lion’s share of the eye-watering cost of this move."

But experts have calculated that the cost to pensions could be significantly higher.

Estimates published earlier this year by the Association of British Insurers (ABI) suggest the overall negative impact of a switch from RPI to CPIH in 2030 would be £96billion.

The hardest hit will be anyone who has a final-salary pension or who has bought an annuity for retirement. These are usually calculated using RPI, which means payments will rise more slowly.

The Pensions Policy Institute has calculated that the move would cost each male, final salary, pensioner £6,000

Women will be even worse off, losing £8,000 each as the change takes place in 2030.

Investors of all kinds will also be impacted if they have index-linked bonds (gilts) that have used RPI - a common feature of many personal and workplace pensions, as well as investment ISAs.

Selby said: “Proposals to abolish the RPI inflation measure risk causing colossal damage to people’s pensions and investments.

“From 2030 onwards the message is unequivocal: if you are negatively impacted by this, tough. The Government is clear it will not provide any kind of compensation to those who lose out as a result of the downgrade in the value of RPI.

“While the average difference between RPI and CPIH might look small at 0.8 percentage points, over time that could lead to a retirement income worth thousands of pounds less.”

What other changes have been announced in the spending review?

Pay freezes for some public sector workers have been announced as the government looks to plug the black hole in the country's finances caused by the coronavirus crisis.

Mr Sunak was also expected to make a decision on whether to extend the temporary boost to Universal Credit, however he remained silent on the issue in his speech.

The chancellor also unveiled a three-year programme — the Restart Scheme — to try to assist more than a million long-term unemployed.

There will be a further £1.4billion of funding for Job Centre Plus.

Mr Sunak will also confirm funding for the next stage of his Plan for Jobs, including £1.6billion for the Kickstart programme, which the Treasury says will create up to 250,000 subsidised roles for youngsters.