George Osborne is set to not only ruffle the feathers of the bond market but potentially catch out investors who believe they are taking sensible precautions to de-risk their pension portfolio as they approach retirement.
This week the Office for National Statistics will announce its recommendations for changing how the Retail Price index (RPI) will be calculated. The ONS are expected to recommend bringing RPI into line with the (lower) Consumer Price Index (CPI) which could result in a reduction of up to 1%.
Great news for the Exchequer as this switch could generate a tidy £3.8 billion windfall for the UK economy; however the implications could be far from positive for anyone holding index-linked gilts, with interest payments likely to be slashed if the change takes place.
In the 5 years up to retirement it is not unusual to see cautious investors gradually moving their pension fund out of equities and into a mixture of cash (to protect their tax free lump sum) and gilt funds which attempt to protect their ability to purchase an annuity when they retire.
These funds quite often include pension index linked gilts so if you are using this strategy in the run up to retirement check the funds exposure to this asset class and keep a close eye on the situation.