2011’s state pension, ISA allowance and social benefit levels are announced

UPDATE 18/10/2011 - for details of annual increases and 2012's state pension, ISA allowance and social benefits - click here

Next year’s state pension, ISA allowances and social benefit levels are announced.

If you follow me on twitter you will be aware that on Tuesday I tweeted the details of September’s inflation figures. Now while most people may only pay a passing interest in the monthly inflation announcements, September’s figures will actually impact on many people’s lives.

What were September’s inflation figures?

Annual inflation in September as measured by the Consumer Price Index (CPI) was 3.1% while inflation as measured by the Retail Price Index (RPI) was 4.6%

And what’s the difference between CPI and RPI?

Both the CPI and RPI are attempts to estimate inflation in the UK. The RPI measure is arguably the better known in the UK. Sometimes referred to as the “headline” rate of inflation, it is the rate often cited by unions as a benchmark for agreeing pay settlements. It was also the basis for pension increases, National Savings Index linked investments and a host of social benefits.

The CPI measure is the rate the government’s overall inflation target is based on. It is an internationally comparable measure of inflation

Both indexes analyse the prices changes of a range of goods and services over time (referred to as the ‘basket’). Some of the goods and services will carry a higher weighting within the indexes, reflecting the fact that we spend more on some items than others. In addition, the actual items which are included in the basket are reviewed each year and are subject to change.

So why do the CPI and RPI values differ?

The answer is that the two measures cover different items. For example, the CPI does not include Council Tax, mortgage interest payments and some other housing costs. The CPI measure also includes some items such as charges for financial services which are not in the RPI. Another difference is that the CPI measure covers a broader sample of the population in its calculations than RPI.

There is also a difference in the mathematics of each index which means that the CPI is always lower than RPI for a given data sample.

So why are September’s inflation figures important?

A host of social benefits and tax breaks were historically increased in line with inflation using the more generous annual RPI figure from one September to the next September. The actual increase to benefits then took affect at the start of the next tax year. However, in the last Budget the Chancellor largely changed the inflation measure from RPI to the lower CPI. So now that September’s CPI figures have been announced the level of people’s state pension/benefits etc for next tax year are now set in stone.

To sum up the situation I have included a summary table from the BBC below. I have amended it slightly to take account of the increases to the 2011 state pension and ISA allowances.

Type of benefit	Previous method of annual increase in April	New method of annual increase in April 2011
Jobseeker's Allowance, Income Support, Housing Benefit, and other income-related benefits	The Rossi index of inflation - which does not include housing costs, rent and council tax - in September	Consumer Prices Index (CPI) in September 2010: 3.1%
Disability Living Allowance, Carer's Allowance and other non income-related benefits	Retail Prices Index (RPI) in September	Consumer Prices Index (CPI) in September 2010: 3.1%
State pension	Retail Prices Index (RPI) or 2.5%, whichever is higher in September	Retail Prices Index (RPI) in September 2010: 4.6% (this method will change in subsequent years). Will increase from the current £97.65 a week to £102.12 for single pensioners and from £156.15 to £163.35 for couples
Tax credits and public sector pensions	Retail Prices Index (RPI) in September	Consumer Prices Index (CPI) in September 2010: 3.1%
Annual ISA allowance	Adhoc increases	Retail Prices Index (RPI) in September 2010: 4.6%, means an increase from the current £10,200 to £10,680

UPDATE: you may find my follow up article of interest - Those leaving it late to fund pensions could be hit twice by the new rules .