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Briefing Notes

Briefing Note 57 - How could CPI indexation affect pension income?

For many years the most commonly used measure of UK price inflation has been the Retail Prices Index (RPI), which measures the rise in the cost of a predetermined basket of goods, which includes housing costs. However, since 2003, the official UK measure of inflation has been the Consumer Prices Index (CPI), which uses a similar basket of goods to measure inflation but excludes housing costs. CPI generally increases more slowly than RPI because the indices use different averaging formulae

The Coalition Government announced in the 2010 budget, that from April 2011, payments from state benefits, public sector pensions and S2P would be indexed to CPI increases, rather than RPI increases.

This Briefing Note looks at which index is a better reflection of inflation, and explores the potential impact of the changes on the pension income of individuals. It finds that the proposals are more likely to affect the pension income of median to high earners than low earners who are likely to receive a higher proportion of their pension income from the State Pension.

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