Negative inflation hits state pension with £2.40 weekly rise

Published on Tuesday 13 October 2009 22:05

THE basic state pension will rise by only £2.40 a week in 2010 after inflation was negative for the seventh month in a row during September, it was estimated yesterday.

The Retail Prices Index (RPI), the figure upon which next April's state pension increase is based, fell to minus 1.4 per cent during September, according to the Office for National Statistics (ONS). But the government has pledged that the basic state pension will rise by at least 2.5 per cent each year if inflation falls below this level, following a backlash after it increased by just 75p a week in 2000.

As a result, it is estimated that the basic state pension for single people will rise from 95.25 a week to 97.65 a week, while couples will see their weekly income from it rise from 152.30 to 156.15.

But the outcome is less certain for other benefits, which also rise in line with September's RPI, although the government has previously said it will not reduce them even if the figure is negative, while it may use discretion to increase them.

A Department for Work and Pensions spokeswoman said: "New benefit levels and tax thresholds for 2010-11 will be announced to parliament at the Pre-Budget Report.

"Benefits can only be uprated or stay the same – they could not fall as the result of a negative RPI or Rossi figure. The state pension will be increased by 2.5 per cent or RPI, whichever is higher."

It is only the second time that a 2.5 per cent underpin for the state pension has been used since the policy was first announced in 2001.

But the increase will be less than half the rise that pensioners received in April this year, after inflation peaked at 5.5 per cent in September 2008.

John Ball, head of defined benefit pension consulting at Watson Wyatt, said: "Last year, pensioners got lucky because September 2008 was a high-water mark for inflation.

"This time, the opposite could be true, but, thanks to the backlash against the 75p increase ten years ago, the Basic State Pension will still go up by 2.40 in April 2010."