24 March 2009
Some personal pensions in payment will be cut if the annual rate
of inflation falls this year. The government is predicting the
Retail Prices Index (RPI) will show a year-on-year drop of more
than 2% by the Autumn.
If that happens, some pension providers have said they will
reduce payments on index-linked pension annuities. However, the
government has promised that the basic state pension will rise by
at least 2.5% even if prices fall year-on-year.
Tom McPhail of financial advisers Hargreaves Lansdowe said:
"Pension annuities linked to RPI would be cut if inflation fell
below zero. Axa, LV, Partnership, some of Standard Life's
annuities, some of Prudential annuities - these companies have said
if RPI goes negative and you have one of these annuities, then your
payments will go down."
But he added that others would not make a cut: "Norwich Union,
MGM, and Legal & General have said your payments wouldn't go
down, they would just stay flat until RPI went back above where it
was before."
The annual rate of inflation measured by the Retail Prices Index
may go negative in March. If that happens, Tom McPhail said it
would affect some people very quickly.
"Generally annuity providers use the RPI figure three months
before you took the annuity out. So if they go down this month that
will affect people who took their annuity out in June last
year."
The news is less bad for people with a state pension. They are
linked to the RPI for September and the government predicted in
last year's Pre-Budget Report that RPI inflation would "fall below
minus 2% in the third quarter of 2009."
The government has promised that the basic state pension will
never rise by less than 2.5% which means an increase of at least
around £2.40 a week in April 2010 even if inflation is
negative this September.
However, no such guarantee exists for other payments such as
Child Benefit, Jobseeker's Allowance and disability benefits.
Tom McPhail also said most company pensions and those paid to
retired workers from the public sector may also be frozen if prices
fall: "The odd one could (be cut) but it would save very little
money and upset a lot of people. So with a company pension you're
probably OK."
