What inflation rate is used for pensions?
In 2010, the government announced a change in what inflation rate is used for pensions. It moved to a Consumer Price Index (CPI) rather than the Retail Price Index (RPI).
This measurement determines how the inflation of annual state benefits and public sector pensions are calculated.
What are the differences between CPI and RPI?
CPI and RPI are sometimes very confusing concepts to get your head around. Certainly in terms of how it affects your pension pot. But this should give you an idea of some of the differences between CPI and RPI:
- RPI is based on the average spending pattern of the UK’s private households. Although, this doesn’t include the spending of pensioners or households in the top 4% of income.
- CPI deals with all private households. This includes residents in student housing and visitors to the UK from foreign countries.
- CPI covers areas which RPI doesn’t – such as stockbrokers fees, university accommodation and university tuition fees from international students.
- RPI includes council tax and other costs of housing which are not covered in CPI.
- RPI includes mortgage interest payments. This means interest rates can affect the RPI. So, if the interest rate is reduced then mortgage interest payments are also reduced. As a consequence, RPI falls whereas CPI does not.
To find out how your pension is affected by inflation, you can check the current CPI rate at the Office for National Statistics.