Page last updated at 12:28 GMT, Tuesday, 13 October 2009 13:28 UK

State pensions to rise by 2.5%

Notes and coins
It will be the second 2.5% pension rise, despite negative inflation

The basic state pension will rise by £2.40 per week next April, even though inflation measured by the Retail Prices Index (RPI) was negative last month.

Theoretically, pensions are altered in April in line with the inflation rate the previous September.

Since 2001, the government's pension policy has been to award a minimum of 2.5% if the RPI is lower than that.

The Office for National Statistics (ONS) announced on Tuesday that RPI last month was -1.4%.

Unless a change to the policy is announced in this autumn's pre-Budget report, other benefits will be unchanged, as they are usually linked to RPI but are not allowed to fall if it is negative.

Carers' allowance, disability living allowance, and statutory maternity pay are all linked to RPI.

Some other state benefits are linked in a similar fashion to another measure of inflation - the Rossi index - which is the RPI stripped of housing costs.

This is currently at +1.8% which suggests housing benefit, council tax benefit, incapacity benefit, job seeker's allowance (JSA) and income support will rise by a similar amount in April.

But the precise amount will in fact be decided by the Chancellor this autumn in his pre-Budget report.

Child benefit, which is administered by HM Revenue & Customs (HMRC), usually goes up in line with inflation.

This will be decided by the Chancellor too.

Company pensions

"This is the second time that the 2.5% underpin has had effect since that policy was announced in 2001 - it also led to a faster rise in the basic state pension in April 2003 after inflation the previous September had been 1.7%," said John Ball of the actuaries Watson Wyatt.

"The measure of inflation used to uprate state pensions ignores spending by the pensioners who most rely on them, and inflation is still positive if you focus on the things they buy.

"By the time we get to April 2010, falling prices could also be a distant memory," he warned.

For a single pensioner the weekly pension will go up from £95.25 to £97.65, while that for a pensioner couple will rise from £152.30 to £156.15.

The actuarial firm pointed out that employer pension schemes typically offer some form of inflation-proofing for pensions already in payment.

But when inflation falls the rules of each scheme would determine what happens.

"Not all private sector pension schemes use September inflation data to determine increases, but RPI inflation has now been negative for seven months in succession, so many schemes using different reference dates will have to grapple with the same issues," said Mr Ball.

"Their response to negative inflation will depend on scheme rules. As in the public sector, it is unlikely that benefits will be cut."

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