Will my pension keep pace with inflation?

sevenhills

I have not claimed my West Yorkshire Pension Fund yet, I am trying to work out its value.

Reading the terms of the pension, it increases with CPI inflation, once claimed, every year. Having done some reading, CPI inflation is 0.9% less than RPI inflation. CPI inflation does not include housing costs, like rent or council tax. I am likely not to pay rent, but I do have housing costs.

If I look at the whole 0.9% lower inflation, after 10 years my money would be worth 9% less, 18% less after 20 years. That is quite a reduction for anyone retiring before the state pension age.

In previous years the state pension had the triple lock, but this year it is increasing by 3.1% when RPI inflation is presently 7.8%

Will the UK economy improve in the next few years in order to allow an above CPI inflation increase?

JohnWinder

I think the CPI reflects the changes in prices from last year, not from the prices 10 or 20 years ago; if so, you need a compound interest calculation for your shortfalls, not simple interest. Thus you wouldn't be 9% worse off after a decade, you'd be 9.4% worse off, and 19.6% after 20 years.

As to your question, predictions about the economy six months ahead, by experts, are often startlingly wrong. How much credence can you put on predictions an undefined few years out?

marlot

RPI is not regarded as a reliable measure any more, and is due to be phased out - I think by 2028.

CPIH takes account of housing costs.

>> I think the CPI reflects the changes in prices from last year
Each delivers a month. quarter or year change AND an accumulated index

eg. for CPIH
https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l522/mm23
https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23

sevenhills

marlot said:

RPI is not regarded as a reliable measure any more, and is due to be phased out - I think by 2028.

Jack Monroe argues the ONS’s latest annual inflation figure of 5.4% for December “grossly underestimates the real cost of inflation as it happens to people with the least,” not just because the cheapest products see some of the biggest hikes, but because supermarkets are slashing the value ranges upon which poorer families rely.

https://www.thegrocer.co.uk/fmcg-prices-and-promotions/is-jack-monroe-right-about-food-inflation-hitting-the-poorest-hardest/663957.article

There is an ongoing debate among statisticians about which measure of inflation is the best for measuring changes in the costs faced by households.

Some 49% of organisations described the CPI as the most relevant indicator of the cost of living, compared with 44% of respondents that favour the RPI measure. For a measure of inflation that is promoted by the Government, that is a vast amount that prefers the RPI method.

The Government use CPI and RPI, so they are on the fence too.

https://www.incomesdataresearch.co.uk/resources/news/rpi-vs-cpi

In 2017, the Royal Statistical Society expressed concern to the Chancellor that the government doesn’t consistently use the same measure of inflation. “All too often”, it says, the government sets payments which people receive (like pensions) against the lower CPI, whilst things that affect people’s outgoings (like the cap on rail fares and student loan repayments) are set against the higher RPI.

The difference between choosing CPI and RPI can have a significant impact on your wallet.

Silvertabby

Don't forget to factor in that public sector increases are uncapped, whereas most private DB schemes are capped at 5%.

This hasn't been so much of an issue over the last 20 years or so of low inflation, but....

Reg_Smeeton

sevenhills said:

In previous years the state pension had the triple lock, but this year it is increasing by 3.1% when RPI inflation is presently 7.8%

I’m astounded more was not made of the governments broken promise on the triple lock. I know it was the wages part that was suspended rather than inflation on this occasion, but the precedent has been set now that if the numbers aren’t what the government want to see they will just override it.

QrizB

sevenhills said:

marlot said:

RPI is not regarded as a reliable measure any more, and is due to be phased out - I think by 2028.

Jack Monroe argues the ONS’s latest annual inflation figure of 5.4% for December “grossly underestimates the real cost of inflation as it happens to people with the least,”

Are you expecting to be one of the "people with the least" in retirement? Because, from the sounds of it, you'll be enjoying a State Pension plus a local government DB one and will be somewhat better off that Jack Monroe's target demographic.

Thrugelmir

The basket of goods used to calculate inflation has many items not applicable to our household. Inflation in reality is very much a personal thing. We all have choices as to how we spend our money. 

Thrugelmir

Reg_Smeeton said:

sevenhills said:

In previous years the state pension had the triple lock, but this year it is increasing by 3.1% when RPI inflation is presently 7.8%

I’m astounded more was not made of the governments broken promise on the triple lock. I know it was the wages part that was suspended rather than inflation on this occasion, but the precedent has been set now that if the numbers aren’t what the government want to see they will just override it.

Furlough caused an anomaly in the increase in wages. No one foresaw a pandemic when designing the triple lock.  There's no magic money trees. Someone has to pay for whatever the Government commits to spend. . 

sevenhills

QrizB said:

Are you expecting to be one of the "people with the least" in retirement? Because, from the sounds of it, you'll be enjoying a State Pension plus a local government DB one and will be somewhat better off that Jack Monroe's target demographic.

I am somewhat poorer than the average poster on these boards, but my aim is to have more money in retirement than I have now.

Even my combined state pension and local government pension is below the average wage. Someone retiring at 60 could have 20/30 years of inflation to cope with.

Notepad_Phil

sevenhills said:

In previous years the state pension had the triple lock, but this year it is increasing by 3.1% when RPI inflation is presently 7.8%

The state pension increases (and also WYPF I believe) are based on the previous September's figures. This mean that when CPI is increasing the April pension increase trails the current rate, but when (hopefully) CPI starts to dampen down then the April increase you'll get will be higher than the inflation that is currently in the system.

sevenhills said:

Will the UK economy improve in the next few years in order to allow an above CPI inflation increase?

Well I hope so, but personally I'm not counting on anything other than CPI rises.