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UK Pension cuts

BBC’s Newsnight this evening was full of a “scare story” about how private pensions were going to be hit hard by new changes. The guy they had reporting on the story clearly didn’t have a clue about how ordinary pensions work (he’s in the BBC pension scheme of course). So what are they talking about? A mountain of a problem, or a tiny little molehill?
The Change:
Replacing indexation by RPI (the higher and old-style inflation rate) with CPI (the newer and generally lower inflation rate). At the moment, RPI is 5.1% and CPI is 3.4%. Very occassionally, CPI is higher than RPI, but RPI is usually the worst of the two. It did however fall into negative territory for a few months last year, as you can see here:
UK Inflation

Annual inflation rates - 12 month percentage change

Who it affects:
Details aren’t fully out yet, but basically people in private sector Final Salary pension schemes will now be affected in addition to the public sector for whom this was already announced. The new announcement affects about 30% of private sector pension schemes; if your scheme is a “Money Purchase” scheme you will be pretty much unaffected.
When does inflation linking affect your pension?
1) If you have a public sector pension that is inflation linked in retirement;
2) If you have a Final Salary Pension linked to a past employment you no longer have ie what are wrongly referred to as “frozen” pensions.
3) When you cash in your private pensions in retirement to buy an inflation linked annuity, you may have to ask which inflation linking it is, and of course if you choose the higher rate of increase your starting amount will be less as your pension pot will be the same whichever annuity you buy with it.
So, if you see scare stories in the press about this affecting people, and TV or papers present huge numbers of the losses people in pension schemes will suffer, be aware it probably won’t affect you. If you do fit into one of the affected categories though, perhaps you should have a word with your IFA to give you some possible action plans.
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