Take a balanced approach to RPI, warns Taylor Patterson
Taylor Patterson is urging clients to take a balanced view of last week’s announcement around the retail price index (RPI), after the Office for National Statistics (ONS) announced that the way RPI is calculated would remain unchanged.If the RPI was brought in-line with the consumer price index (CPI), as some thought it would, individuals with pensions and investments in index-linked bonds faced losing thousands of pounds a year.
This is because the CPI rises at a much slower rate than RPI, and switching to this index would have seen pensions income and return on index-linked investments fall dramatically over a typical 20-year retirement.Instead, a new index will be created called the RPIJ, which will address the differences between the RPI and CPI, mainly the fact that CPI is more aligned with international standards.
The RPI will still be used to calculate pensions and investments.James Thompson, chartered financial planner at Taylor Patterson, warned that keeping RPI is not all good news.
“I’d advise a balanced view”, he said. “On the face of it, this announcement appears to be positive news, but don’t always expect RPI to be higher than other measures of inflation.”RPI was originally created as a compensation index after the First World War, but more recently, CPI has been used by the government for indexation of benefits, tax credits and public service pensions.
James added: “I don’t necessarily think that CPI should be seen as a negative measure, because it was established to enable greater comparison with the way Europe and the rest of the world measures inflation.
“Whilst RPI provides a better measure for inflation now, it does not mean that this will always be the case.”