Lifetime pension income to fall by up to 21% under new inflation measures

Research published by the Pensions Policy Institute, building on previous analysis by Insight Investment, shows that the change results in a significant loss of value to individuals over time.

The government is consulting on changing the RPI to CPIH between 2025 and 2030, as it feels CPIH is a more accurate inflation measure.

However RPI rises by around 0.75% a year more than CPIH. According to Insight Investment, the compounding effect of this difference over time would mean someone buying an RPI-linked annuity at age 65 would see their aggregate lifetime payments reduced by between 10% and 15%. The PPI has estimated the impact on DB schemes at as much as £80 billion.

According to the PPI's research, a 65 year old pensioner in 2020 could receive up to 21% less per year in a DB pension by the age of 90.

By a 65 year old (in 2020) man’s average life expectancy of 86, yearly average DB income under RPI uprating would be around £6,300pa. This could drop by 17% to £5,200pa if the change took place from 2025, or by 12% to £5,500pa, if the change took place in 2030.

By a 65 year old woman’s average life expectancy of 88, yearly average DB income under RPI uprating would be around £6,200pa. This could drop by 19% to £5,000pa if the change took place from 2025, or by 14% to £5,300pa, if the change took place in 2030.

The PPI recommends that the government continues to calculate and publish a ‘legacy’ RPI for existing contracts, such that anyone receiving contractual benefits today could continue to enjoy the current calculation methodology.

Tom McPhail, head of policy at Hargreaves Lansdown, 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."