Treasury could face huge hit as inflation rise pushes up pension payments

Rising inflation means the Government will have to pay out an extra £1.3billion this year in state and civil service pensions.

It is September's RPI (retail prices index) figure which is used to calculate the increase in the following year's pension and benefits payments.

With RPI at 5 per cent, this should mean the full state pension for a single person will increase by £4.55 to £95.25 in April next year.

elderly pension

The National Pensioners Council has called for an immediate increase in the state pension as elderly people struggle to cope with expensive food and fuel costs (posed by model)

Yesterday the Department for Work and Pensions refused to confirm the rise. It said an announcement will be made before Christmas.

It will cost the public purse an extra £900million to pay the higher state pension bill, said pension experts Watson Wyatt.

This is because Labour had predicted the basic state pension would cost £52.7billion in 2009-10 - based on an inflation rate of 3.25 per cent.

John Ball, head of defined benefit consulting at Watson Wyatt, said: 'If inflation peaked in September, this is good news for pensions but bad news for the Government.'

The annual rise in pensions paid to retired public sector staff is also linked to September's inflation figure - and likely to cost an extra £ 400million next year.

The jump in inflation will also lead to higher than expected rises in a range of benefits.

But the 5 per cent rise in the state pension is 'too little, much too late', said Help the Aged yesterday.