How proposals to scrap the Retail Prices Index could affect your pension


The government is proposing to replace the Retail Prices Index (RPI) within the next decade and it could have a significant impact on your financial security in retirement.

The change to the way inflation is measured could affect the amount you receive from your Defined Benefit (DB), Final Salary pension.

A recent report from the Association of British Insurers (ABI) claims that planned changes could cost those pensioners and savers affected around £122 billion.

What are the changes, and how might they affect your long-term planning?

Proposals would see RPI replaced by CPIH

The RPI was once the official measure of UK inflation. More recently, however, it has been increasingly discredited, and the government is now proposing to replace it with a version of the Consumer Prices Index (CPI).

Both the RPI and CPI use the change in the price of a representative ‘basket of goods’ to calculate UK inflation. The issue is that both measures give different inflation figures.

RPI has tended to be higher than the CPI, by around 1% on average over the last ten years. That means that if you have savings, investments, or pensions currently linked to RPI, the value of your fund and the size of your pension payouts could be affected when the change comes into force.

The government consultation is looking to make changes from either 2025 or 2030. If the proposed changes take effect, RPI will be scrapped and replaced with a new variant of CPI, known as CPIH.

CPIH (the H effectively stands for housing) is largely the same as CPI except that it ‘includes the cost of living in and maintaining one’s own home.’

What this means for your finances

As we have seen, RPI is generally higher than CPI and that could have a large impact on your savings and investments.

The effect it has will depend on the type of plan you hold, your retirement, and the date the changes come into force.

RPI is the measure currently used to calculate increases for many DB pensions. Replacing RPI with CPIH could mean that your annual pension rises more slowly once the changes are made.

The Pension Policy Institute (PPI) suggests that a 65-year-old male could see their DB pension income drop by 17% if the proposed changes took place from 2025, or 12% if the changes occur in 2030.

Women have longer life expectancies and therefore, as a female, you could find your retirement income reduces by as much as 20%.

RPI is also used to calculate returns on government-issued bonds held by pension funds (as well as ISA and life insurance funds). The same PPI report confirms that the value of pension schemes invested in these gilts could drop by as much as £80 billion.

The ABI believes that the date the changes are made could make a substantial difference. They suggest that implementing the proposed changes in 2025 would leave savers worse off by up to £122 billion. The figure drops to £96 billion if the changes are delayed for a further five years.

Due to this vast difference, the ABI is asking for the later date to be used. They also suggest that the government should pay compensation to those affected.

What can you do now?

The changes are still at least five years away. Your investments are for the long term, diversified, and designed to mitigate the impact of the unexpected. If you are worried about the effect these changes could have on your retirement planning, get in touch.

Pension savings linked to RPI might need to be re-examined in light of the proposed changes and dependent on the way they are implemented. If the Treasury opts for the later date and includes compensation payments, the material impact on your fund and income might be small.

We keep up to date on regulatory changes across our sector, ensuring we’re well placed to adapt your financial plan to changing circumstances and ensure that you can still meet your retirement goals.

Get in touch

Your long-term financial plan is designed to give you the retirement you want, and we can help you to mitigate the impact of any Treasury changes between now and your normal pension age.

If you have any concerns about the effect the proposed changes to RPI might have on your pension schemes, get in touch.

Please email or call 0115 933 8433.

Please note

A pension is a long-term investment not normally accessible until 55. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation which are subject to change in the future.