22 April 2009
Inflation figures published for March have shown that inflation
has gone negative to 0.4%. This is the first time that this has
happened since 1960. In February inflation was 0%. The Office of
National Statistics (ONS) stated that the change had come mainly
from energy prices as the price of oil was significantly below the
level it had been in the same month last year. We have had a number
of recent queries on deflation and its effect on pension
entitlements.
The basic state pension is increased each April in line with the
preceding September RPI annual inflation figure. This year's
increase based on last September's RPI is actually 5% bringing the
basic state pension for a single pensioner up to £95.25 a week from
April 2009. The Government has recently confirmed its commitment to
increasing the basic state pension by a minimum of 2.5% pa and so
pensioners are likely to gain not lose in the event of continuing
very low or even negative inflation.
Occupational pensions are also protected from deflation as they
cannot normally be reduced and a proportion of pensions are
increased by fixed percentages, usually between 2.5% and 5% per
year.
Pension annuities (i.e. those derived from a personal or
stakeholder plan) sometimes have fixed percentage rises built in to
them which will continue. There is however a risk that annuities
that are linked to RPI could reduce in the event of deflation, but
this will depend on the terms of the policy.
