Court ruling could mean you miss out on 20% of your pension retirement income

On 1st September 2022, a High Court ruling confirmed that many UK pensions would be impacted by the UK Government’s Retail Prices Index (RPI) inflation reform. The RPI inflation reform is expected to be in place by 2030. Depending on your pension scheme, you could lose up to 20% of your retirement income.

What is the RPI reform, and how does it affect me?

In November 2020, the chancellor of the exchequer announced that the RPI measure of inflation would be brought in line with the UK’s official Consumer Prices Index, including owner-occupiers’ housing costs (CPIH).

RPI is used to calculate annual increases on rail fares, student loans and pensions.

What happened?

Trustees of company pension schemes, including BT, Marks & Spencer, and Ford, lost a High Court challenge to protect millions of their members from the RPI inflation reform.

The ruling means that anyone with an RPI-linked pension now stands to miss out on tens of thousands of pounds they could have received. Furthermore, as CPIH is typically lower than RPI, any pension growth linked to CPIH will be lower.

What is the reason for this change?

Many statisticians have widely discredited RPI since 2013 because it usually overstates inflation compared to CPIH.

CPIH is the measure of inflation used by the Office for National Statistics (ONS). CPIH includes housing costs (not price), many experts believe it should be used ahead of RPI as a more accurate measure.

For example, RPI calculates the interest payments on student loans and index-linked bonds, so students and consumers will pay higher interest rates. RPI is also used to calculate increases in mobile phone bills, rail fares and taxes, typically higher than they would be under CPIH.

The RPI reform is meant to correct this.

Unfortunately, any pensions linked to RPI will be impacted. As RPI-linked pensions grow with the RPI rate, switching them to the CPIH rate (typically lower than RPI) means they will not grow as much.

How many people will be affected by this change?

There are about ten and a half million people in the UK in a defined benefit pension scheme that will see funds go to the Treasury. This is because the pension money is invested in government bonds that pay out in line with RPI.

Who will be affected?

The RPI inflation reform will affect anyone with a defined benefit pension (salary-linked/final salary). Therefore, you should speak with a regulated financial advisor if you have a defined benefit pension scheme.

What is the reaction from pension experts?

Many experts are concerned. With inflation continuing to rise, retirees are feeling squeezed on living costs. Even the High Court has estimated that the average pensioner will see a 4-9% drop in their income.

The RPI measure of inflation has been the official UK measure since 1956. The change to CPIH will cause many pensioners to miss out on a lot of money if they don’t act now.

The good news is that the switch to CPIH will not occur until 2030. So there is time to review your options and protect your retirement income from the changes.

How AHR can help

As an expat, you could mitigate these changes now and benefit from a pension transfer.

We’ve helped thousands of British expats transfer out of defined benefit pensions into a private pension where their funds are invested, outperforming the inflationary growth of their previous pension.

You might be able to do the same, whilst also enjoying:

  • Greater control of assets and expenses.
  • Earlier access.
  • Income flexibility (for example, receiving a higher income rate earlier in retirement).
  • Significant purchase considerations (ability to source lump sums).
  • The ability to leave 100% to your family.
  • Reduce the amount of tax that you pay.
  • Ability to generate returns exceeding inflation.

You can arrange a free pension transfer consultation with one of our specialist advisers here. Don’t worry if you are already living overseas. We regularly conduct reviews via video call (Zoom) at times that work for you.

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