Little-known gold-plated pension tweak will cost retirees £53187

A pension warning has been issued as thousands face a £50,000 hit to savings.Retirees with private “defined benefit” pensions could lose tens of thousands of pounds due to a change in how inflation will be measured, experts have warned.

As it stands, most defined benefit pensions rise annually with the Retail Price Index (RPI). But from 2030, RPI will be aligned with the Consumer Prices Index, including Housing Costs (CPIH), which is, on average, 0.5 per cent lower.

A 66-year-old saver entitled to a yearly income of £25,000 from a private sector defined benefit pension can expect to receive a total income of £853,944 under the current system over a 25-year retirement, according to analysis by insurance firm Royal London.

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But this falls to £800,757 under the new CPIH – a drop of £53,187. Steve Webb, partner at pension consultants LCP and a former pensions minister, said: “Most people will have little idea of the exact rules about how their company pension increases each year.

“But the change to a new measure of inflation will clearly lead to lower increases in future for anyone whose pension is linked to the retail prices index. Although the change each year is small, for someone retiring this year the cumulative effect could be to reduce such pensions by around 10pc by the time they turn 80.”

LCP warned: "The CPIH gives a lower measure of inflation than the RPI – by around 1% per year on average since 2010. This will mean that RPI inflation is expected to be materially lower from 2030 than it would otherwise have been. Lower RPI inflation will impact many aspects of a DB pension scheme (whether liabilities are RPI or CPI linked), including benefits, funding, investments and company accounting figures."

The Retail Prices Index (RPI) is the oldest measure of inflation in the UK and is still used widely across the economy and in financial contracts. However, it has a number of shortcomings which have meant that for the best part of a decade there have been concerns that it is a “flawed” statistic.