RPI could hit pensions - deVere featured on Financial Times - Nigel Green


14 Jan, 2013

RPI could hit pensions - deVere featured on Financial Times

The deVere Group was featured on the Financial Times today as CEO Nigel Green warned savers that the decision not to effectively reduce RPI is likely to accelerate the number of pension schemes that switch indexation from RPI to CPI.

Consequently, millions of people saving into private sector pensions could face significant cuts in their retirement income as the door opens for schemes to use a less generous inflation measure.

Click here to read the full article on Financial Times.

On Thursday, 10th January 2013, the Office for National Statistics is set to publish its recommendations regarding the changes to the Retail Price Index. Meanwhile, Nigel Green, the chief executive of a leading financial group, is warning pension savers worldwide that a change to the way the inflation measure is calculated means another hit for their retirement savings.

Industry experts indeed expect the ONS to announce a change in the formula to calculate the RPI in order to bring it in line with the Consumer Price Index.

The CPI is typically between 0.5% and 1% lower than the RPI. Compounded over years, this makes a big difference for pension savers. If an individual retires at 65 and lives until they are 85, the change from RPI to CPI could therefore lead to a reduction in their retirement income by a fifth.

Speaking on the economic voice, Green warned workers on the brink of their retirement years that if the recommendations are implemented by the UK Chancellor George Osborne, it would be ‘another hammer blow for pension holders’ who are still in schemes that offer RPI increases.

The change to CPI will thus mean that those who put money aside in a UK inflation-linked scheme in pursuit of being able to enjoy a comfortable retirement, will see their annual pension increases slashed overnight.

Moreover, if government gilts are affected by the change, deficits in company pension schemes would drastically increase since they are 50% invested in gilts on average – another blow for company pension scheme holders.

Switch to CPI could wreak havoc UK pensions

The latest government move to link pensions to inflation via the CPI index could ‘wreak havoc’ UK pension funds and as such, savers need to urgently act in order to mitigate the effects.

The Chief Executive of the deVere Group, Nigel Green, is warning that very few Britons are aware that if pension funds are linked to Consumer Prices Index it could wreak havoc their retirement savings. This is because CPI is generally lower than RPI which means that each year individuals with a final salary scheme will receive less pension payments.

Mature Times
quoted the expert financial advisory as saying that when compounded over years, this makes a big difference. ‘If an individual retires at 65 and lives until they are 85, the change from RPI to CPI could lead to a reduction in their retirement income by a fifth’.
Moreover, speaking to the Financial Times, Green said that the gloomy economic outlook has encouraged investors to pile into bonds as they are perceived to be safer than other asset classes. However, with gilt yields at record lows, individuals approaching retirement need to rethink their investment strategy to avoid the risk of getting trapped in poor-performing bond funds.

As such, it is imperative for pension savers to rethink how they could mitigate the negative impact of the index switchover. Pension holders should consider transferring their scheme into a defined contribution scheme, such as a SIPP in the UK, or a QROPS if they live outside of the UK.  Such schemes are personal arrangements that allow the individual to benefit from greater investment performance and flexibility. 

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