Have a pension? You might have less of one now

Category: Annuities
Date: 7/13/2010

Last week Steve Webb, the Minister for Pensions, announced the controversial measure that occupational (or final salary) pension schemes would be required to index deferred pensions and pensions in payment in line with the Consumer Prices Index (CPI) rather than the current measure of the Retail Prices Index (RPI).

What does it mean?
"…And?" I hear you ask. Well both RPI and CPI are measures of inflation, that is, the measure of how much things are worth. A key difference (although not definitive in itself) is that CPI doesn't include mortgage interest payments whereas RPI does; but the key thing in relation to your pension is that CPI tends to give a lower inflation rate than RPI. Over the long term this is likely to mean a reduction in the pension received by members of occupational final salary schemes.

So a reduction in the amount of money you receive as a pensioner leaves a hard choice between three equally unappealing alternatives: accepting a lower standard of living in retirement, having to use other savings to top-up your income or even getting into debt to maintain your standard of living.
Pension arrangements are a complicated matter, and should be thought through very carefully. If you are concerned about how this change might affect you, speak to your financial adviser.

I don't have an occupational final salary scheme: am I affected?

Importantly, Personal Pensions, Stakeholder Pensions or occupational money purchase schemes are not changed by this measure. With these kinds of pension you need to purchase an annuity, which is a product designed to pay you an income in your retirement.

These plans can offer a great deal of flexibility in the benefits they provide but make sure you shop around to get the best income possible. Any increase you can get over the annuity offered by your existing provider will be payable for the rest of your life and could make a huge difference to the standard of living you enjoy in retirement. If you have any medical conditions or a "negative" lifestyle habit (such as smoking) you should consider an Enhanced Life Annuity as this can significantly improve the income you receive from your pension.

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