A government change to the way the Retail Prices Index (RPI) is calculated is set to result in a fall of up to 21% the value of payments made to members of pension schemes and annuity holders, according to new research published by the Pensions Policy Institute (PPI).

The research, which builds on previous analysis by Insight Investment, showed that the technical change would result in a significant loss of value to individuals over time, with the Government consulting on making the change between 2025 and 2030.

According to the PPI, the average life expectancy of a 65 year-old man in 2020 is 86, meaning the yearly average defined benefit (DB) income under RPI uprating would be around £6,300 per annum. The research suggested this could drop by 17% to £5,200 per annum if the change took place from 2025, or by 12% to £5,500 per annum, if the change took place in 2030 – all in 2020 earnings terms.

By contrast, the research revealed that women would be more affected than men due to longer life expectancy.

The average life expectancy of a 65 year-old woman in 2020 is 88, meaning the yearly average DB income under RPI uprating would be around £6,200 per annum. This could drop by 19% to £5,000 per annum if the change took place from 2025, or by 14% to £5,300 per annum , if the change took place in 2030 – again all in 2020 earnings terms.

The calculations indicated a 65 year-old pensioner in 2020 could receive up to 21% less per year in a DB pension by the age of 90.
 
Hargreaves Lansdown head of policy, Tom McPhail, commented: “Anyone who has joined a pension scheme or bought an annuity expecting to receive RPI linked increases to their income, should continue to receive those benefits in line with the contract they bought into.

“Arguing that they’ll still receive an RPI-linked benefit but then changing the definition of what RPI means, is a bit of Alice in Wonderland logic; it looks like it could be an April Fool, but for anyone facing the prospect of losing up to 21% of the value of their pension, this is no laughing matter.”

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