Negative inflation impacts DB pensions

September’s inflation is a major factor for DB pensions. The announcement that CPI is negative for September is particularly important as most DB pension schemes (and the state pension) use September as the reference month for increases to be applied next year.

David Brooks, Pensions Consultant at Broadstone commented:

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 "For many schemes, especially where contracted out benefits have been earned, this will mean that no increases will be provided. However, for those schemes with rules that appear to require RPI to be used, or with trustees who insist on using RPI despite the fact that the ONS makes it clear at every possible opportunity that RPI is a duff index, members will enjoy a 0.8% increase. It is hardly equitable that a slip of the draughtsman’s pen, or the reactionary nature of some trustees, has created this discrimination.

September’s CPI is also significant for valuing the rate of growth of an active member’s DB pension for Annual Allowance purposes. There is an allowance for inflation and for the 2016/2017 tax year inflation will be zero and so before the Annual Allowance tax charge kicks in member’s pensions will only be able to grow by £2,500. This is not withstanding the complication of carry forward, application of the Alternative Annual Allowance (where someone has taken flexible access) or the tapered Annual Allowance. The upshot is that for the next year the Government is likely to see an increase in tax charges as members exceed the Annual Allowance. However, the issue remains that the data gathering of the Annual Allowance tax charge is a shambles and if the point of a reduced Annual Allowance is to recoup the tax relief then the Government should ensure that people are declaring and accounting for the tax charge."

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