Elderly set for 4.6% state pension boost

This means the basic state pension will rise from £97.65 to £102.15 in April 2011. The joint pension will rise from £156.15 to around £163.35.

This will come as a relief after last year's blow, when RPI fell into negative territory, which meant pension payments rose by only the minimum amount set - 2.5%.

The Government uses RPI each September to determine the following April's rise in the basic state pension, although it has pledged a minimum rise of 2.5% or the increase in average earnings, dependent on whichever is higher.

The irony is that while historically earnings have always grown faster than prices, now the much-called for link has been restored the opposite is true. Average weekly earnings grew by 1.9% in the year to July.

And from next year, basic state pension calculations will switch to CPI, which may mean lower increases.

John Ball, head of UK pensions at Towers Watson, said, 'In 2012, pensioners are forecast to get a smaller increase than they would do with the old RPI link. Over time, however, the earnings link is an expensive commitment and the State pension Age will have to rise faster to help balance the books.'

Recipients of public sector pensions, the State Second pension and some private sector defined benefit pensions already see a rise of only 3.1%, after the government switched the benchmark for these benefits to CPI.

This will also hit benefit payments, with the government switching to CPI this year for jobseeker's allowance and tax credits.

John Ball said this means that, 'Someone receiving £10,000 this year from a public sector pension scheme can expect this to rise to by £310 in April. Under the old rules, it would have been £460.

'If the forecasts used in the Budget prove correct, their annual income should be about £900 lower than it would have been by 2016.'

As for company pensions, pensions minister Steve Webb has said that increases to 'all occupational pensions' should be based on CPI inflation. However, it is unclear how extensively this will be taken up.

John Ball said, 'Three months after the Government said CPI inflation would be used in private sector schemes, employers and trustees are still in the dark as to what the policy is. It has not said employers will be allowed to override scheme rules without trustees' consent, nor ruled this out. Unless that happens, many pensioners will still be able to look forward to RPI-based increases.

'In most schemes, the situation is clearer when it comes to people who have left the employer but not yet retired. Here the member's loss is their former employer's gain.'

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