By David Porter, Financial Planning Consultant, Armstrong Watson LLP

AS was widely expected, the Chancellor’s Spending Review passed without any of the previously mooted tax announcements.

However, whilst the economic financial focus is very much on survival, the Chancellor has frequently indicated that a day of reckoning is on the horizon and there were some ‘subtle hints’ as to what may come.

One key potential change was revealed in the documents released alongside the recent Spending Review. This would see the value of millions of future retirees’ pensions reduced due to a planned change in the way pension payments are to be calculated from 2030.

The overall rise in the cost of living is currently calculated using various measures, including the Retail Prices Index (RPI) measure of inflation, which has long been argued is no longer a valid measure of inflation and as a result, come 2030 RPI is likely to be aligned with new measure of inflation called CPIH - the Consumer Prices Index (CPI) plus Housing costs.

Many people with defined benefit or final salary pension schemes currently see their pension payments increase each year in line with the cost of living. If annual increases in pension scheme payments become less generous, overall income will reduce as a result. If we look at the current rates provided by the Office of National Statistics (November 2020) we can see the difference; RPI is currently 1.3%, whereas CPI is only 0.9% i.e. around 30% less.

Women (who usually live longer), new or future retirees would be affected most, according to the Pensions Policy Institute. Over time, the value of these pensions for individuals could be thousands of pounds less than expected.

Industry experts have warned that this change could cost savers and investors up to £122 Billion and leave pension schemes around £80 Billion worse off. This is because this potential reform also needs consideration from an investor perspective. All pension funds also hold index-linked gilts - government debt currently linked to RPI inflation - and these would also become less valuable if this change progresses. Conversely, pension funds would also pay out less to members in retirement, so the direct impact of the funds will depend on the mix of their investments and what they have to pay out to pensioners.

We expect over the coming years there are likely to be future changes to pension allowances, tax reliefs and the rules surrounding pensions. This latest change is an early signal in this direction. However, if you plan ahead for retirement you are much more likely to be better prepared and more comfortable as a result. For support and advice to help plan for your retirement contact David Porter on 0776 695 3454 or email david.porter@armstrongwatson.co.uk