Pensions: Why yesterday’s inflation ‘non announcement’ shouldn’t hide the real issues

It had been thought that a relatively obscure announcement yesterday, on changes to how the Retail Prices Index (RPI) was calculated, would heap further financial pain on savers and retirees.

Along with the Consumer Price Index (CPI), RPI is one of the main two measures of inflation in the UK. It had been thought that a much anticipated announcement yesterday morning would change the way that inflation was calculated and reduce the published RPI rate.

Inflation falling, good news you might think. In fact, if the change had gone ahead it would have affected a wide range of people, especially pensioners with pensions and Annuities linked to RPI and also savers, for example those people with National Savings & Investments Index Linked Certificates, where the rate of interest is also linked to RPI.

Whilst the news that pensioners lucky enough to have index linked pensions, will not see their incomes rise more slowly in the future and savers will get the ‘full benefit’ of RPI linking, the media coverage did rather mask, albeit temporarily, some of the more fundamental problems facing savers and pensioners at the moment.

Pensioners and Annuity rates

Most industry experts were agreed that over a 20 year period the proposed change to the way RPI was to be calculated would eventually have reduced a pensioner’s income by around 20% per year.

Whilst we would have been sympathetic if the change had actually been made, surely the bigger problem, which needs addressing now, is the fact that Annuity rates have fallen by over 10% in 2012 (Source: Moneyfacts) and that very few people retiring now can actually afford to buy an indexed linked Annuity.

Annuity rates have plummeted over the past year and have fallen in 15 out of the last 18 years. The falls are mostly due to rising life expectancy, but have been accelerated over the past couple of years as a result of Quantitative Easing and falling gilt yields.

Falling savings rates

Again, if the new RPI calculation had been introduced it would have affected savers with inflation linked accounts.

National Savings & Investments Index Linked Certificates have always been popular with savers, but other accounts would also have been affected. Last year saw a wave of inflation linked savings accounts brought to the market; the returns on these would also have been cut. Furthermore, because this type of account cannot generally be cashed in early, savers would have been stuck with the accounts paying a lower rate of interest than they thought they would get when the accounts were opened.

Again we would have been sympathetic, but surely the bigger problem is the very low interest rates savers have had to put up with for years now? Which of course have been pushed off a cliff over the past few months by the Funding for Lending Scheme, which is giving banks and building societies access to cheap money, meaning they have less need for savers deposits.

The toxic combination of low bank base rate, the Funding for Lending Scheme and current levels of inflation, is causing a perfect storm, where there isn’t a single savings account currently available, which will allow basic rate taxpayers to get a real, above inflation, return on their savings

An opportunity missed

It is widely recognised that pensioners suffer inflation at higher rates than either of the official measures of inflation; in many respects today was a lost opportunity to introduce a measure of inflation specific to older people.

So, whilst the RPI announcement, or should we say ‘non announcement’ is certainly good news for some pensioners and savers, any change would have only been felt in years to come and was relatively minor, in our opinion, compared to the major problems of falling Annuity and savings interest rates, which have fallen off a cliff and show no sign of climbing back up again.

Unintended consequences

Pensioners and savers, many of whom are retired, have had to put up with the unintended consequences of two government backed support mechanisms for the economy, namely the Funding for Lending Scheme and Quantitative Easing.

Whilst it unclear how successful these measures have been in achieving their aims, one thing is certain, they have hurt pensioners and savers, reducing incomes and eroding the true value of their savings.

We believe it is high time that greater consideration was given to the needs of savers and older generations, but call us cynical, we won’t be holding our breath.

Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income and savings strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk