RPI changes & income in retirement

People in retirement could be hit hard as a result of changes to the calculation of official price inflation figures.

The Office for National Statistics (ONS) is currently consulting on changes to the way in which they calculate the Retail Prices Index (RPI) measure of price inflation.

If implemented, these calculation changes could result in lower RPI figures in the future.

People in retirement are likely to be those who feel the greatest impact of these changes.

Future increases to RPI linked pension income, typically available to those who purchased an inflation linked annuity with their personal pension or private sector occupational pension funds, could grow at a slower rate in the future.

Pensioners also tend to hold inflation-linked savings or investments, such as the National Savings & Investments (NS&I) inflation linked bonds or index-linked gilts issued by the Government.

A change to the RPI calculation is being considered because of the risk that the gap between RPI and CPI will rise in the future.

RPI tends to rise faster than CPI, with average gap of 0.9% since CPI was first introduced in 1996.

This gap can vary by quite a wide margin, from 0.4% in August to 2.3% back in August 2007. This gap is mostly now influenced by the way in which the calculations are made for each measure.

Inflation is a very important consideration in Financial Planning, particularly in retirement.

Understanding the eroding impact of inflation on your income, savings and investments over time is one factor in making sure that you live within your means and never run out of money.

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