Speaking at his Autumn Spending Review 2020 in Parliament, Sunak warned MPs that the British and global economies face a hard ride before they get back to any semblance of normality.
Chancellor Rishi Sunak has warned that although a long hoped for COVID-19 vaccine is on the way, the economic fall-out from the pandemic has only just begun.
Much of the impact will be borne by retirement savers who will see changes that reduce the value of their pensions.
From his speech, there is no good economic news, just not such bad news.
Britain, he said, can expect the economy to contract by 11.3% this year and the country will not return to pre-pandemic economic proportions until the end of 2022.
That will mean most people will be poorer and many will lose their jobs as businesses face the worst recession in 300 years.
What The Chancellor Said
Government borrowing will rise to the highest ever level outside of wartime to try and cushion the blow.
The independent Office for Budget Responsibility has cast an eye over the Treasury’s figures and reckons the jobless total will hit 2.6 million as firms struggle to recover from the COVID-19 lockdowns.
Laying out how he and the government plan to deal with this economic emergency, Sunak revealed Britain has borrowed an enormous £280 billion to fund the handling of the COVID-19 pandemic.
He outlined the measures he is taking to MPs, with these main points:
- Pay for public sector workers will be frozen in 2021-22. Only around 2 million National Health Service workers, including doctors, nurses plus a million other public sector workers earning less than £24,000 a year will get a rise of at least £250 a year
- Unemployment is expected to rise to 7.5% or 2.6 million workers by Spring 2021
- Aid for overseas countries will be slashed from 0.7% of GDP to 0.5% – a cut of around £4 billion, leaving £10 billion in the pot to fund help for the poor and natural disasters around the world
- A new fund – also £4 billion – to top up infrastructure spending in a bid to kick-start job creation around the country
- The National Living Wage climbs 2.2% to £8.91 an hour
Millions Face Pension Woe
Millions of retirement savers are likely to see a big change in the way cost of living increases are added to the value of their pensions from 2030.
The Chancellor did not speak about how this will happen, but the details are in documents published by the government alongside his speech.
The proposed upheaval will not impact state pensions, but the value of workplace retirement saving.
Most pension uprating is calculated using the Retail Price Index (RPI) even though the official measure of inflation is the Consumer Price Index (CPI),
Historically, the RPI returns a higher rate of inflation than the CPI due to the underlying data included in the index. The RPI considers the cost of housing, while this is excluded from the CPI.
The current RPI inflation rate is 2.8%, while the CPI is running at 1.9%.
Because pension increases are pegged against RPI and will change to CPI, retirement savers will see their pots upgraded by a lower inflation rate.
Although this could mean pensioners losing out on thousands of pounds during their retirement, the change is welcomed by students and rail travellers, whose debts and tickets will rise by less each year as the RPI is axed.
Public sector pensions are already uprated against CPI, thanks to former Chancellor George Osborne making the switch in 2010, so those worst affected are private sector workers in company pension schemes.
Private pensions, like SIPPs and the Qualifying Recognised Overseas Pension Scheme (QROPS), are not increased in line with the cost of living, so they are unaffected.
Investors could also suffer as pension funds hold government-backed gilts which are uprated against RPI. These funds will lose as the CPI will make their holdings less valuable than expected.
The government has also clearly stated no compensation will be considered for anyone losing money from the change of inflation calculation.
Spending Review 2020 FAQ
Everyone twigged the cost of COVID-19 would be high – but not as high as £280 billion while devastating the economy and jobs.
Chancellor Rishi Sunak has laid out the scale of the pandemic’s impact on the economy but has left how the government will tackle the deficit open-ended for his Spring Budget 2021.
What is the Spending Review?
The Spending Review is a state of the nation’s finances speech from Chancellor Rishi Sunak. The review takes the place of the Autumn Budget, which was moved to the spring, and talks about government debt and financial targets rather than policy and tax changes
Will we all pay more tax?
One way or another. The Chancellor has already hinted that capital gains tax rates will change and his ‘we’re all in it together’ mantra indicates that he intends to raise income and other taxes next year to pay for the dreadful coronavirus devastation of the economy.
Will ditching the RPI mean pensions are worth less?
Yes, but it’s a paperwork exercise. By switching to the CPI, the rate pension payments are uprated every year compared to inflation drops, but that’s not money anyone has in their pot, just a potential forecast.
The change will not take affect until 2030, so retirement savers have fair warning to make changes if they can before then.
Will the RPI change mean my state pension is less?
No. The State Pension will be unaffected by the change as any uprating is already in line with CPI and other formulas detached from the rate of inflation.
If nothing’s changing for at least 10 years, what’s the review about?
Nothing really! It’s the Chancellor softening us up for some tough financial measures next year in his Spring Budget. The delay until March means nothing changes until the next financial year which starts on April 6.