Pensions and benefits must rise to meet cost of living, says IFS

Benefits should rise to match the soaring cost of living as millions face crippling price rises driven by energy bills, a think tank has said.

Many benefits and the state pension are inflation-linked, but - by convention - rates this year were set in April, before prices started rising rapidly.

It means most will only go up by 3.1% in April, half of the expected increase in the cost of living.

The Institute for Fiscal Studies (IFS) said 10 million people were affected.

Raising benefits and the state pension to the same level as inflation in April would mean preventing a £290 real fall in benefit income year on year for this huge group, the economic research body said.

"Doing so would compensate benefit recipients on average for higher costs, including energy costs. This need not be a permanent increase. Future up-rating can be adjusted once inflation has fallen back," said Robert Joyce, IFS deputy director.

Such a rise, albeit temporary, to benefits, Pension Credit and the state pension would cost the Treasury £4.5bn, which makes such a move highly unlikely, not least for political reasons.

Households with typical energy usage face a £600-700 rise in annual bills without government intervention. That would put a typical annual energy bill at around £2,000. The rise in the state pension set for April amounts to an annual increase of less than £300.

Chris O'Shea, chief executive of British Gas owner Centrica, told the BBC there was "no reason" to expect gas prices would come down "any time soon".

The IFS points out that lower-income households spend almost three times as much of their budgets on gas and electricity as the highest-income tenth on average (11% versus 4%).

It said that, to help these people, the government should consider a long-term change that meant rises in benefits and the state pension should not be linked to inflation seven months prior to the change, as is the case now. Instead, the decision should be taken much closer to April, when the increases take effect.

In the meantime, financial experts have said that everyone needs to brace for a year of rising prices.

"Our budgets are coming under extreme pressure from the big squeeze, and for the next few months it is only going to get worse," said Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.