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Price index revamp delivers 'major blow' to retirement plans

Pension savers face a serious blow to their retirement prospects with confirmation this week on changes in how the retail price index (RPI) is calculated.

The Office for National Statistics' reform of the RPI is expected to lead to rates of the key inflation benchmark coming into line with the traditionally lower consumer price index (CPI).

This will be bad news for those who have bought, or are planning to buy, index-linked annuity contracts – which convert a pension pot into an income for life – as annual increases are linked to the RPI.

In all but a handful of months over the past decade the RPI – which crucially includes housing costs – has been higher than the CPI.

"Changing the RPI so that it more closely resembles the CPI is bound to cost many retirees and those with pension savings dear," said Tom McPhail, the head of pension research at Hargreaves Lansdown. "Many annuity contracts have RPI increases built in – if this measure doesn't grow as fast in the future then savers will not enjoy the scale of retirement income they'd have hoped and planned for. This is another major blow to pension savings."

Workers may also lose out through reform of the RPI, as many unions put in pay claims linked to this measure. In a note, Joanne Livingstone of Punter Southall said although the RPI reforms were "dressed up as an academic change", it will in fact be a "critical decision likely to affect the income of workers and pensioners alike."

The change is expected to come into force almost immediately.