A pension warning has been issued as thousands face a £50,000 hit to savings (Image: Getty)
Thousand of retirees have been warned of a little-know tweak to the gold-plated pension scheme that could cost them £50,000.
Currently, most defined benefit pensions increase annually in line with the Retail Price Index (RPI).
However, from 2030, RPI will be adjusted to match the Consumer Prices Index, including Housing Costs (CPIH), which is typically 0.5 percent lower on average.
This means the members of these schemes will get a reduced amount of income over the course of their retirements.
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.
Defined benefit pensions offer a guaranteed annual income for life based on a worker’s salary (Image: Getty)
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.”
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The Retail Price Index (RPI) is a measure of inflation in the UK that tracks changes in the cost of a fixed basket of goods and services, including housing costs such as interest payments.
It is often used for adjusting pensions, wages, and some financial contracts.
However, RPI is generally considered to overstate inflation compared to other measures like the Consumer Prices Index (CPI) and Consumer Prices Index including Housing Costs (CPIH).
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.”