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Page last updated at 15:28 GMT, Saturday, 21 March 2009

Inflation fall will hit pensions

By Paul Lewis
BBC Radio 4's Money Box

A basket of goods
The RPI is expected to fall to zero or go negative on Tuesday

Some personal pensions will be cut if the annual rate of inflation falls this year.

The government is predicting the Retail Prices Index will show a year-on-year drop of more than 2% by the Autumn.

If that happens, some 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 Lansdowne told BBC Radio 4's Money Box which pension annuities linked to the Retail Prices Index (RPI) would be cut if inflation fell below zero.

"Axa, LV, Partnership, some of Standard Life's annuities, some of Prudential's annuities - these companies have said if RPI goes negative and you have one of these annuities, then your payments will go down," he said.

But he added that others would not make a cut: "Norwich Union, MGM, and Legal and General have said your payments wouldn't go down, they would just stay flat until RPI went back up above where it was before."

Since the programme was broadcast Axa and LV have said that they have reviewed their policies and have no plans to reduce annuities if RPI inflation falls below zero.

Below zero

The annual rate of inflation as measured by the Retail Prices Index (RPI) 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," he told the programme.

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 £2.40 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.

They would be frozen if the annual rate of prices falls.

Tom McPhail also said most company pensions and those paid to retired workers from the public sector will also be frozen if prices fall: "The odd one could [be cut] but it would save them very little money and upset a lot of people. So with a company pension you're probably OK."

BBC Radio 4's Money Box was broadcast on Saturday 21 March 2009 at 1204 GMT.

The programme was repeated on Sunday 22 March 2009 at 2102 GMT.

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