Long-awaited reform

Private pensions to be hit by change to inflation measure

pension pot

Savers will see their investments fall in value

Private pension holders and those on benefits will among be the losers while students and rail passengers will be the gainers if, as expected, Rishi Sunak confirms a change in the measure of inflation in Wednesday’s Spending Review.

The Chancellor is tipped to scrap the higher Retail Prices Index (RPI) for the Consumer Prices Index plus housing costs (CPIH) measure which is generally about 0.8% lower. RPI last month was 1.3% while CPIH stood at 0.9%.

The long-anticipated change would save the Treasury around £2 billion a year on interest payments for index-linked gilts.

However, it could cause havoc in the savings industry because RPI-linked increases are written into millions of financial services contracts. 

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Tom Selby, senior analyst at AJ Bell, says: “There are, for example, defined benefit (DB) schemes where scheme rules require members’ retirement incomes to rise in line with RPI.

“Annuities have also been sold on the promise of RPI protection, while index-linked gilts, which are held by huge numbers of investors either individually or via their pensions, are also pegged to RPI inflation.

“If these contracts are to effectively be torn up and RPI replaced with CPIH, millions of savers and investors stand to lose out as a result.”

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