The government will today switch the inflation benchmark for pensions and benefits from RPI to CPI, potentially shaving millions off investors' savings.
CPI was today announced at 3.1%, still well above the government's target of 2%, but far below RPI which was 4.7% last month.
The Office for National Statistics says on average the gap between RPI and CPI is 0.75%, but it is expected to grow over the past five years. This means, in relative terms, money in pension pots will be worth less when it is paid out than when it was paid in.
Towers Watson calculates even if the gap between PRI and CPI remains as it is, pensioners currently receiving £10,000 will receive £11,400 rather than £12,200 in 2016.
Whilst all private pensions will now be linked to CPI, expect those that have RPI explicitly written into their structure, state pensions may not be linked to CPI permanently.
The government says it will link state pension increases to the higher of inflation or earnings in 2012.
TUC general secretary Brendan Barber tells the Guardian: "The government's switch to CPI indexation for pensions is the most insidious cut so far.
"The government admits that payments will be reduced by 7% a year by 2016. Even the basic state pension will be hit in years when earnings growth is low."
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