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Savings and pensions face cut in proposed inflation overhaul
Government to consider ‘trimming’ RPI in a move that would hit certain savings, investments and pensions.
Image © Tim Scrivener – Rex Features
Returns offered on certain savings and pensions face a sharp cut if proposed plans to reduce government's borrowing costs get the go-ahead.
The Office for National Statistics (ONS) will meet in early October to discuss the possibility of 'trimming' the Retail Prices Index (RPI) measure of inflation so that it is more closely aligned to the official Consumer Prices Index (CPI) measure.
In recent years, RPI has tended to run far higher, and any move to bridge that gap could save the government billions of pounds as it would reduce the cost of its debt interest repayments as they are.
However, many savers, pensioners and investors would face a stiff penalty as their returns are similarly linked to RPI.
What exactly is being proposed?
On 8 October, the Consumer Price Advisory Committee - a part of the ONS - will meet to discuss four possible outcomes for RPI, ranging from leaving it unchanged through to aligning it completely with CPI.
That consultation will close on 30 November and any recommendations for change will be announced in January.
RPI (2.9%) is currently 0.4% higher than CPI (2.5%) and the gap between them has been as wide as 1% in recent years, so there is scope for a significant reduction.
Why does that matter to you?
The RPI measure is used to calculate the annual increase for a number of private pensions and also the returns on index-linked gilts.
And it's not just pensioners and investors at risk: many savers flocked to inflation-linked savings products when RPI soared above 5% last year. In order to get the very best rates, many required that you lock your savings in for up to five years.
These savers are potentially facing a dramatic fall in return. It's worth stressing, however, that 'traditional' savings accounts like easy access and fixed-rate accounts would be unaffected.
Not all bad news
What's interesting to note is that a cut in RPI could be good news for some, given that many annual price rises are hinged on RPI.
Consider commuters as an example. The government has announced an RPI-plus-3% hike for rail fares in 2014, so a lower RPI would mean smaller increases.
Of course, this is all just theoretical at the moment - the consultation will only begin next month and it'll be some time before we get a clear idea of what it will mean for all parties involved.
The four proposals in full
The options under consideration are as follows:
- No change - the reasons for the formula effect gap have been identified, explained and understood.
- Change one particular approach to averaging prices - which calculates the average of price relatives (the amount a price changes) over time for the same type of item where there is no information about precise expenditure - for a limited number of categories (for example, clothing), with options of the method to be used in its place. This would reduce but not remove the formula effect gap as some difference between the RPI and CPI formulation would remain.
- Change one particular approach to averaging prices - which calculates the average of price relatives over time for the same type of item where there is no information about precise expenditure - for all categories that use it, with options of the method to be used in its place. This would reduce the formula effect gap to a minimum, although some difference between the RPI and CPI formulation would remain.
- Change the RPI so that its formulae align fully with those used in the CPI - this would remove the formula effect gap between the RPI and CPI, though there would remain differences in estimates because of the different coverage, weights, products etc. used in each.
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11Comments
21/09/2012 16:51
Robbing the poor to pay the rich sums up what the ConDems are all about. We could have saved a fortune by not going to Afghanistan for ten years, achieving nothing because Alqeda had moved to Pakistan. After ten years with nothing to show our bright politicians tell the Taliban we are leaving in two years, which means that they have won. Which also means that the brave troops who died did so for nothing, until the politicians put a spin on it.
21/09/2012 15:42
21/09/2012 17:22
William mcgowan, this year HMRC has written off over £500 billion pound worth of 'bad debts' from major companies. Get the useless so and so's to do the work that they have been paid to do and we would ALL be in clover. £59 billion dosn't seem that much by comparison. Personally I think it disgracefull that the government has done nothing,that has been reported anyway, to repair this state of affairs.
21/09/2012 16:14
21/09/2012 18:12
I've just read the suggestion by a leading Tory for making the UK a tax haven and just how many MPs and peers are closely involved in off shore tax avoidance companies I seriously worry about who these people are, how they get nominated as MPs and why we vote for them. Time we looked extra hard at our local parties' selection processes - I think they've been hijacked by the 'old boys' network.
21/09/2012 17:08
from last year 2011 to 2012 this year the goveremnt has borrowed another 59billion pound putting us in more debt the borrowing has gone up from 49 billion last year wat ever next they say they want toreduce the borrowing and get this country back on it feets how the hell we gonna do that with a goverment like we have now
30/09/2012 12:02
It wasnt hijacked. It is a natural function that the old boys network rules. They do not mind who appears to rule as long as they have their priviledges and the plebs are kept relatively in their place. To suggest that people look hard at the selection processes for candidate selection, how boring can things get? Candidate selection must be a party issue, so presumably one would have to be a member of the party to be involved in the selection. Is it possible to be a member of all of the political parties to have any input? It would seem therefore the selection system is cloaked in secrecy to which not many people have access. Secrecy allows corruption to hide behind closed doors, which we used to think was a Johny Foriegner trick until we found our honourable members milking the expenses schemes at Westminster, Edinburgh, Cardiff and Belfast and our large Companies had to operate slush funds to operate successfully abroad
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