Pensions and annuities hit as inflation falls to 0%

24 March 2009 / by Rachael Stiles
The Retail Price Index, used to measure inflation, has fallen to zero, the lowest level since 1960, raising fears that the UK is facing a prolonged period of deflation.

January's data showed that the Retail Price Index (RPI) rose just 0.1 per cent that month compared to the same time last year, the Office of National Statistics said last month, and it fell to zero per cent in February, it announced today.

Meanwhile, Consumer Price Inflation (CPI) has had an unexpected surge, rising 3.2 per cent, which is what the Bank of England uses to set interest rates.

But the RPI is the measure implemented by the Government to set interest rates on the state pension, welfare benefits and index-linked government bonds, so the disparity between consumer inflation and incomes of pensioners and those on other benefits will become greater.

The decline in the RPI is thought to be largely due to the recent fall in mortgage repayments, because over the same period, the RPIX (the all items RPI excluding mortgage interest payments index) rose 2.5 per cent year-on-year, up from 2.4 per cent in January.

Mortgage payments have seen a dramatic decline in recent months as the Bank of England has cut the base rate from five per cent in September to just 0.5 per cent in March.

Savers and those with incomes reliant on annuities which are linked to RPI will lose out, especially pensioners, who face rising prices despite the fall in the Retail Price Index, argues retirement specialist Nigel Barlow from Just Retirement.

The products and services on which pensioners spend the majority of their income, such as food and energy, are still high, and the Institute on Fiscal Studies has calculated that those aged between 70 and 79 were facing inflation rates of 5.6 per cent in January and this figure was worse for older pensioners.

"The combined effect of almost zero interest rates and a high rate of specific inflation, in contrast to the general RPI picture, mean that pensioners could be suffering a dramatic fall in living standards unless they have access to other sources of funds to shore up their income," Mr Barlow said.

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