Annual rise will be guaranteed minimum of 2.5% after September figures show sharp fall in inflation

Alistair Darling will announce a £2.40 weekly increase in the basic state pension in this autumn's pre-budget report, after official figures showed a sharp fall in the annual inflation rate last month.

The government's guarantee that pensions will be uprated by a minimum of 2.5% a year was triggered after the latest figures for the cost of living showed the retail price index measure of inflation standing at minus 1.4% in September. For a single person, the pension will rise from £95.25 to £97.65 a week next April, by which time City analysts expect inflation to be higher.

Whitehall normally increases pensions and other welfare payments using the September data but the Treasury introduced special arrangements for the elderly during periods of low inflation following the furore over a 75p a week increase in 2000.

Cheaper food and no repetition of last year's sharp increase in energy bills were the main factors dragging down living costs last month, according to the Office for National Statistics. The inflation yardstick used by the Bank of England to set interest rates, the Consumer Price Index, dropped from 1.6% to a five-year low of 1.1%, but remains higher than the minus 0.3% average for the eurozone.

Last year, those claiming state benefits enjoyed much bigger increases after the jump in oil prices to almost $150 a barrel resulted in RPI inflation peaking at 5% in September.

Andrew Harrop, head of policy at Age Concern and Help the Aged, said: "Although the commitment to raise the basic state pension by at least 2.5% will be a relief for older people, a £97.65-a-week pension is still not enough to ensure a decent standard of living to people who have worked hard all their lives.

"While pension credit will rise in line with earnings, benefits linked to the headline inflation, such as attendance allowance and disability living allowance, will be frozen unless the normal procedures are changed."

The government has pledged not to cut other benefits even if inflation is falling and has the discretion to raise them in the pre-budget report.

"New benefit levels and tax thresholds for 2010/2011 will be announced to parliament at the PBR", a Department for Work and Pensions spokeswoman said today.

"Benefits can only be uprated or stay the same. The state pension will be increased by 2.5% or RPI, whichever is higher."

City economists said the 1.1% CPI inflation rate in September would be the trough, with higher oil prices, the reversal of the cut in VAT and the drop in the value of the pound leading to steady increases over the coming months. David Page, economist at Investec, the City bank, said he expected CPI inflation to top 3% by early next year.

Basic state pension to go up to £97.65, but amount is still 'woefully inadequate', say age charities

The basic state pension will rise by £2.40 a week next year following the publication of figures showing another fall in inflation.

Each year's basic state pension payment increase is based on the previous September's figure for the retail price index, which this morning was revealed to be -1.4%. However, the government had already promised it would up-rate weekly payments by the equivalent to the higher of RPI or 2.5%. This means pensioners will see their basic pension increase from £95.25 to £97.65 a week.

A spokesman for Age Concern and Help the Aged (the two charities recently merged) said the basic state pension was woefully inadequate: "£97.65 a week is still not enough to guarantee people a decent standard of living. The pension system needs urgent reform to ensure older people can live off their pensions without having to apply for benefits."

Cormac O'Dea, research economist for the Institute of Fiscal Studies, said pensioners were subject to a different rate of inflation to that of younger consumers in the UK. He said: "It is reduction in the mortgage rates that has driven RPI down, and most pensioners do not have mortgages."

However O'Dea said the IFA had calculated that the inflation rate for pensioners in August stood at 1.9% – well below the expected increase in state pension payments.

Pensions gap

The pensions gap between men and women has widened in the past year despite an increase in the number of female savers putting enough by to finance their retirement, according to a report published today.

The latest edition of the Women and Pensions Report, produced by insurer Scottish Widows, suggests 47% of women are saving adequately for retirement compared with 59% of men. Last year the report found 46% of women and 55% of men were putting away at least 12% of their income into a pension, which the company says is enough to provide a comfortable retirement.

The report, which is based on adults aged between 30 and the state pension age who earn more than £10,000 a year, found the gap between the amount saved remains substantial. While women who contribute to a private pension scheme pay in an average of £184 a month, men contribute £331.

The disparity means that if a female saver who starts a pension at age 30 could achieve a pay out of £5,800 a year when she retires at 65 while a male contemporary could get a retirement income of £10,400 a year.

Although the number of women saving adequately has edged up slightly, the number who are not saving at all, even though they can afford to do so, has increased from 22% in 2008 to 26% today.

As in previous years, Scottish Widows found one of the main barriers to saving among women was having children. Almost a quarter of women said they had stopped or reduced their contributions as a result of starting a family.

Only when it comes to the economic outlook do women seem more positive than men. While percentage who believe job insecurity and the poor economic outlook will prevent them for saving in the coming years has doubled to 12%, the percentage of men who feel the same way has gone up from 8% to 17%.

The closure of final salary, or defined benefit, pension schemes is also likely to hit men harder as they are more likely to be members.

"There is a long way to go before women catch up with men when it comes to pensions savings but the issues of taking time out to have children and interrupted working patterns are never going to change," said Ian Naismith, head of pensions market development at Scottish Widows.

"While it is encouraging that younger women accept that the state will not provide them with enough to fund their retirement, there is still more that women can do to save for their futures.

Malcolm McLean, chief executive of the Pensions Advisory Service said the state pension system made life very complicated for women.

"The government has done quite a lot to improve the lot of women, but they have always had quite a raw deal out of the pension system in this country," he said.

McLean said changes which allowed women to share pensions on divorce and, from next April, qualify for a full state pension after making national insurance contributions for 30 years instead of 39, were helpful but had served to complicate matters, with few women understanding exactly what help they were entitled to.

"Well-intentioned and very necessary changes have created a very complicated system and that throws up hits own problems," he said.

At the weekend the Pensions Advisory Service pointed out that women earning less than £95 a week were missing out on tax credits that could help them build up qualifying years for the state pension.

"A number of women who may have been earning £80 to £90 a week might be able to get their earnings up to that level and get that credit," McClean said. "We have got to help women understand it and get the credits they are entitled to. At the moment many are slipping through the net."

This week the Pension Service is writing to tens of thousands of women this week to remind them of the change to the number of qualifying years needed to build up a full pension.

It is encouraging both men and women to check that they are on course to receive a full basic state pension by calling 0845 300 0168 or visiting www.direct.gov.uk/pensions to get a forecast.

In a triumph of upside-down logic, the myth that an overpaid state sector is to blame for the crisis has taken poisonous root

Remember, this week is exactly a year since the banks tottered, when only the power of government stood between us and a worse depression than the 1930s. I met a level-headed senior economist that day in the street who said buy pasta, lentils and tins, quick.

What a long time a year is in politics. Since then the Cameron and Conservative myth machine, aided by their progeny, the Taxpayers' Alliance, have rewritten last year's history. In a breathtaking logical somersault they have persuaded people that state extravagance is to blame for the deficit, not reckless banks. "It is more government that got us into this mess!" David Cameron declared in last week's speech, to cheers from the conference. No, it was not. Only a lot more government and mountains more taxpayers' cash got us out of a mess caused by runaway financiers.

It took upside-down logic to blame the victim: the swollen state became the cause, not the result of the bankers' recession. It must be cut, shrunk, shrivelled and taught austerity while its featherbedded denizens are dosed with corrective medicine. If the Conservatives win, that's what Cameron and Osborne promise loud and clear, cutting both the size of the state, which means jobs – and cutting pay.

So there would be a freeze in most of the public sector. George Osborne said a year's freeze could save the equivalent of 100,000 jobs. People are often willing to hold back pay if it saves their jobs in a crisis, but Osborne's freeze is not accompanied by a no-sacking pledge. On the contrary, he would cut the civil service by a third, starting with a 25% cut from the Ministry of Defence.

In hard times it is easy to create scapegoats – and so the myth that an overpaid public sector is to blame has taken poisonous root in public opinion. The Taxpayers' Alliance purveyed this non-statistic: "State workers now earn an average of £62 a week more than their private-sector counterparts." They add, "We cannot pay these enormous bills for people who are not creating wealth."

This is nonsense economics when state spending is the main motor of growth. But it's also a rubbish figure concocting a fallacious average. You can't average out the two sectors because there are five times more unskilled workers in the private sector – most manual jobs have been contracted out from the public sector. The state sector is far more highly skilled: ONS figures show only 8.6% of people in the private sector are in professional grades, against nearly a quarter in the public sector. Comparing grade for grade, they are paid 70p an hour less for working for the state.

Even then, comparisons are difficult as so few jobs are genuinely comparable. We all encounter some disobliging jobsworths in the public sector; no one claims the six million public servants are all saints. But most state jobs are, by their very nature, more responsible and stressful, requiring multiple skills in dealing with difficult public needs – and mistakes matter more. That's true in the "bureaucracy", whether in the Department for Work and Pensions dealing with welfare-to-work and benefit claims, or in Revenue and Customs, dealing with tax or tax credits – before considering nursing, teaching or social work. Managing a hospital, a local authority or a large comprehensive far exceeds in skill, complexity and stress the job of managing an equivalent-sized company with a single objective – the bottom line. Nonetheless, these rarer public sector skills are less well-rewarded than in the private sector. Say it again, say it often, they are paid less – for the lie has become a generally accepted truth.

Here's some history: between 1993 and 1999 the public sector was badly squeezed. An acute shortage of nurses, teachers and doctors and other skills ensued, as it always does. Labour paid out for a good catch-up between 2000 and 2004, which transformed the number and quality of people entering these professions. But after 2005 the brakes came on again. In 2008 inflation was 4%, but the public sector was on 2.5%. The crash caused a brief anomaly when public sector pay rose while inflation plummeted. Nonetheless, according to Ken Mulkern of Income Data Services, the public sector still lagged 1% behind the private sector for most of 2008 – average private-sector pay rose by 3.5% while the public sector only got 2.5%.

Ah, but look at their gold-plated pensions! Yes, pensions are their traditional compensation: those whose private pensions have tanked look on with envy. But the real problem is everyone else's lack of occupational pensions, especially women, not excess in the public sector, where the average is only £7,000 a year. Reduce that, and the state makes no saving, as people are so poor they draw pension credit instead. Scapegoating public employees isn't the answer to a private sector where employers once gave 8 million people pensions while now only 2 million receive them. Meanwhile, half of all pension tax relief goes to the top 10% of earners, and a quarter goes to the less than 1% who earn over £150,000.

Those who took a freeze this year didn't lose much, with inflation so low, but next year Income Data Services predicts inflation at 2.5% to 3%. That means Osborne's total freeze – or Alistair Darling's 0%-1% rise – imposed across the public sector will hit them much harder. In the present anti-public sector climate, they are likely to keep falling behind. The old cycle will repeat itself as talent is drawn away leading to key skills shortages, less qualified applicants and a downgrading of esteem, status and respect for the work they do.

If these times need sacrifice, the pain has to be fairly shared. The asset sales announced by Gordon Brown yesterday are only a small contribution. Grossly dysfunctional pay scales in the private sector have leached into the public sector, where the gap has also yawned too wide – but less so. Neither Labour nor Tories have anything to say about unjust pay structures, but they can't expect the public sector to take the hit alone. Where is the quid pro quo?

Tory thinkers predict a cascade of strikes over public pay and job cuts, with a hint of "bring it on" bravado: let's have the great showdown. They eye the management and workers' mutual suicide pact in Royal Mail with glee – strikes make privatisations easy. Cameron and Osborne declared war on the public sector last week, heralding an era of catastrophic confrontations. But once the true facts are out there, an aggressive Conservative government may find voters' sympathy rapidly swings behind their public servants.

• Former New Star boss says complexity hides excessive fees
• Fund managers' practices played big part in financial crisis

A City insider today blasted "hidden charges" imposed by fund managers that double the fees imposed on investors to more than £10bn a year.

Alan Miller, a former director of New Star Asset Management and one of the industry's big names, said fund managers had maintained complex cost structures to hide bloated and excessive fees that added an estimated £5.8bn to the £4.3bn annual charges explicitly reported by major firms in the Square Mile.

Miller argued the industry's standard measure of the operating costs – the total expense ratio (TER) – should be replaced with a calculation that includes all the costs of running a fund.

Consultants Watson Wyatt said the same problem affected private equity investors who faced unwarranted charges and "egregious terms".

It said: "Management fees form too high a share of a firm's compensation and are therefore the most significant factor misaligning their interests with those of its [investors]. This misalignment is exacerbated by the manner in which performance fees are most commonly calculated in the bigger markets."

Their call adds to the discontent among a growing band of investors and advisors who argue that attention on the banking industry has deflected politicians and regulators from clamping down on practices that arguably played a greater part in fostering the financial crisis.

Hermes, the fund manager for the massive BT and Post Office pension schemes, has spent the past year lobbying in Europe and the US to promote shareholder activism.

Colin Melvin, the head of the fund advisory arm, Hermes Equity Ownership Services, has voiced concerns that shareholders failed to restrain the debt fuelled borrowing binge that eventually caused the crash. He has attempted to build a coalition of investors to confront excessive fees imposed by fund management houses.

His colleague David Pitt-Watson, who gave evidence to the Treasury select committee during the financial crisis, recently warned that up to 40% of private sector pension pots are swallowed up in fees.

In a report for the Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA) he argued that investors found "fund managers unaccountable and institutions opaque".

He criticised the process of "churning" through which shares held in a pension plan are sold and the funds switched to buy other assets. Miller estimated that a typical fund manager would turn over about 57% of their portfolio each year, which added "various costs amounting to a further 1% a year".

He said the "true cost of investment" was pushed up from an advertised average of 1.6% to an average 3.8% per year over a five year period.

Miller, who co-founded wealth management business SCM Private earlier this year with a claim to provide clear charging structures, said: "These hidden charges act as a significant drag on performance, particularly when overall returns are low.

"The TER calculation excludes a host of additional costs and it's time for a new calculation to be adopted that includes actual management fees and all other charges impacting on investors' total returns."

British investors have £88.45bn invested in UK All Companies funds, paying an estimated £1.9bn in additional charges each year on top of the "reported" £1.4bn of annual charges the fund management industry declares through the TER benchmark.

"If this level of difference between the TER and true cost [total cost of investment ratio, TCIR] was applied to all UK unit trusts and open ended investment companies invested in equity markets worldwide, investors could be facing annual hidden charges of as much as £5.8bn in addition to the £4.3bn in annual charges calculated via the TER," Miller said.

Retirement pots could be raided under scheme to encourage savings culture

Flexible pensions allowing Britons to raid retirement pots in times of financial need could be introduced under Tory plans to boost saving for old age.

The idea follows David Cameron's pledge in his party conference speech last week that thrift should be "rewarded". It reflects concerns that many people are not building a nest egg for retirement because they do not want to lock money up in case they need it for a rainy day.

However, the plan risks people being left even poorer in old age if they withdraw too much to buy homes or survive redundancy. Similar schemes allowing people to release equity in their homes have caused problems when house prices crashed.

Theresa May, the work and pensions secretary, told a recent CBI conference that she was interested in whether schemes such as the 401k retirement plan offered in America or New Zealand's Kiwisaver scheme could encourage a "more healthy savings culture" in Britain. Labour ministers are looking at savings schemes for long-term goals such as buying property or adult education.

The US model lets people borrow money back from their future pension pot to pay college fees, buy property or cope in an emergency such as unemployment or expensive medical treatment. Ros Altmann, the former Downing Street pensions expert, said it was potentially "counter-productive" to insist on locking away money for retirement if it meant younger people refused to save.

With politicians too frightened to be truly radical, millions of old people struggle in poverty

Pensions have hit the headlines again, highlighted this time by Tory proposals to accelerate the timetable for raising state pension age. They say it is necessary to fund planned increases to the meagre basic state pension. Having risen only in line with price inflation for several decades, it has fallen way behind average earnings. The 2007 Pensions Act provided for a restoration of the link with earnings inflation by 2015 at the latest, yet even before this starts the Conservatives claim it may be unaffordable.

How can this be? The changes to the state pension were part of the detailed reforms arising from the 2006 Pensions Commission report. Just three years ago ministers assured us these represented "the most radical reform of the pension system since Beveridge", and the commission itself welcomed them as "a new pensions settlement which could last". But apparently they already need to be changed. So much for long-term thinking.

The reforms were not really radical; they were a political compromise. The changes entail tinkering with the existing system instead of carrying out the complete overhaul that is needed to bring the system into the 21st century. Can we rely on politicians to rise to this challenge? Political time horizons are short-term, pensions policy long-term.

Perhaps because pensions are so important to every potential voter, politicians have been too frightened to be truly radical. But there are times when such boldness is essential. Just changing state retirement age is not the answer. Just re-tying the basic state pension to earnings inflation is not a solution either. The national insurance system has failed pensioners. Our state pension is about the lowest – and by far the most complex – in the developed world. It has also failed to cope adequately with women's work patterns. Already, just under half of UK pensioners end up having to claim means-tested benefits to avoid poverty.

We should think afresh. We need to end the confusion between pensions as a later-life social safety net and as a long-term savings vehicle. If the state provides a social welfare base, people can be encouraged to provide more for themselves. At the moment, the state pension does not provide adequate social welfare, yet mass means-testing undermines private provision.

After a lifetime of contributions, a person with a full national insurance record will be entitled to the princely sum of £95.30 in basic state pension, perhaps with a bit extra from the state second pension. This is not enough to avoid poverty. So millions have to claim pension credit and other means-tested benefits, which give them at least £130 a week. Anyone over 60 who has not bothered to save, does not keep working and has no other income can receive more than those who contributed loyally to national insurance and saved for their future. This is not a sustainable position.

We need to sweep away the mind-boggling complexity of our current system. We do not need both a basic and a second state pension, each with different qualification rules, neither of which provides adequate welfare. Far more sensible would be to introduce a simple, flat-rate basic minimum pension, set at or slightly above the pension credit level, which could take over from the existing provisions from at least age 75. The majority of over-75s are entitled to pension credit anyway, and there would be savings from scrapping the means test. The costs would easily be funded by changes such as ending contracting out, reducing the regressivity of national insurance or adjusting the age allowance.

Such a pension would avoid mass means-testing of pensioners, so they would not be penalised for having saved, as well as encouraging more flexibility around retirement. Then people can decide whether and how much longer they want to work and more easily plan for later life income. This could end poverty among the elderly, end the means test for most older citizens and would finally be fair to women.

It need not even entail extra government spending. But it would require visionary courage and a commitment to the true simplification of pensions, both conspicuous by their absence in recent years.

George Osborne's proposals for a delayed retirement will rob the poorest pensioners of a valuable slice of life

George Osborne insists that repeated allusions, in his conference speech, to the much-loved High School Musical song, We're All in This Together, were inadvertent. If so, perhaps a powerful unconscious desire to emphasise the fresh and youthful aspects of his party explains an apparent fascination with Disney's teen phenomenon.

We're All in This Together is certainly well chosen: a vibrant number that could have been written with the renewed Conservative party's inclusive message in mind. You will recall how the lyric continues: "Everyone is special in their own way" (a line that might have been written for Eric Pickles)… "We're not the same, we're different in a good way."

For example, some of us, like George Osborne, are young. Others old. We might even be female, in a good way. As George put it, in a commendable channelling of the High School Musical vibe: "Don't just follow the crowd or you will lend up lost." But for all our tremendous diversity, the song reminds us: "We're there for each other every time/Together come on let's do this right." And doing it right, as young George announced last week, means: "Our aim will be to bring forward the date when the pension age rises."

To much of his audience, already softened up for pension deferment by Lord Turner, his plan for retirement at 66 made perfect sense. Which of us is not familiar with appalling prognostications that depict a vast, yet tottery army of interminably demanding pensioners whose needs will bring the country to its knees?

Moreover, it is often asserted, most modern older people are fit and raring to work into their seventies, particularly when increased life expectancy suggests that they may live to an age that makes that 122-year-old woman who used to sell paint to van Gogh look positively pubescent. Why stop work at 66 when, pretty soon, we're all going to be like Anne Robinson and live until we're 140, still looking gorgeous on Botox and relocated bottom fat?

It is customary, at this point, to mention Viagra, B&Q, the astonishingly old undergraduate, Sir Oliver Popplewell, and his near contemporary, the pension-inventor Bismarck, who inquired, in 1883, when it was that people usually died. Hearing that it was 65, Bismarck selected that year as the perfect age to start providing benefits for unemployed Germans. Is it not mad, with average life expectancy now 79, that we should stick to arrangements prevalent during the era of the unification of Germany? Even if so many of the additional years of life we have been gifted are likely to be spent learning the truth of Philip Roth's recent observation: "Old age is a massacre."

Nowadays, every increase in life expectancy can also be read as a more substantial increase in years of ill health. But the only year of retirement young Mr Osborne is interested in, of course, is the first, and healthiest one.

In fact when they reach 66, what may worry his newly indentured drones as much as anything is the pervasive dislike of old people in an unashamedly ageist society. But perhaps this will change as we begin to recreate a world without retirement. Hasn't the BBC, leading the way, already launched a search for a presentable, middle-aged woman who is able to read? Although you are more likely to find Ming Campbell joining the Abercrombie & Fitch sales team these days before you see a venerable person anywhere near the stage at a political conference. God help any 66-year-old trying to break on to the front bench of the Conservative or Labour party: the average age in Brown's first cabinet was 49.

Responding to Osborne's "we're all in this together" plan, campaigning groups have already pointed out that, although more affluent pensioners can escape drudgery, his "we" includes millions of workers for whom the basic state pension and benefits are everything. For 17% of single pensioners, and 7% of couples, this is their only source of income. For vast numbers – 45% of couples – it amounts to more than half their income. So, for as long the pension is denied, they may be stuck in hard, poorly paid jobs whose stressfulness far exceeds that of the ostensibly pressurised occupations our ageing professionals are so eager to keep.

One thinks of Tony Blair, who could easily take early retirement but prefers to carry on with his performing work. But it's hard to know how many of these endlessly driven achievers there are. The most work-shy professionals may be slow to confess to indolence or even dwindling ambition in a culture where the prime attribute is to be hard working. Only losers, surely, admit that their work ethic is so weak they can't wait for permission to stop?

For professionals who secretly endorse Philip Larkin's sentiments ("Why should I let the Toad work/squat on my life?"), there is at least the hope that young Osborne has not stolen much of their precious free time. (Larkin died at 63.) A clean-living librarian, for example, with a post-retirement life-expectancy of around 20 years, may be content to exchange a one-year Osborne detention for a significantly enhanced state pension.

For an unskilled worker, however, from an area where people might expect to die 10 years earlier, probably after some years of ill health, the proposal is an unconscionable rip-off. Retirement at 66 is not just a lousy financial deal for impoverished pensioners, who get fewer years of state support in exchange for contributions paid over a working life, but Osborne's scheme could cheat them of a tenth of their retirement. He wants the best, irreplaceable year of what remains of their lives.

Indignant fiftysomethings have already condemned Osborne's proposed breach of contract whereby as taxpayers they will be swindled out of a promised pay-out, but the loss of 12 months of longed-for leisure, after which the only certainty is physical decline, is surely the more serious theft. Time is to be taxed, along with income, but only if you're poor.

You wonder, given Osborne's confident announcement of this outrageous wheeze, if he is even aware of the consequences for the non wallpaper-manufacturing classes. In the history of modest proposals, his plan to reharness pensioners to service debts run up by their leisured and longer-living betters is surely up there with Swift's edible babies.

The difference in fortunes between Britain's richest and poorest, emotionally cited by Cameron in his appeal to the huddled masses, is nowhere more pitilessly displayed than in the contrasting lengths of their lives. At the last count, a professional man in the UK could expect to live, on average, eight years longer than his unskilled contemporary. Osborne could at least have acknowledged this when he proposed his scam, by suggesting that either pensionable age or pensions be linked to life expectancy. He chose not to. Because we're all in this together. Too bad that some of us will be together for quite a lot longer than others.