Annuity experts have welcomed the Office of National Statistics' (ONS) surprise decision to keep the current measure of inflation.
The ONS had consulted on changing the calculation of the Retail Prices Index (RPI) to bring it in line with the Consumer Prices index which tends to be lower.
Commentators feared any change would lead to pensioner detriment as many annuities are linked to RPI. Alan Higham, chairman of Annuity Direct said the proposed change would have meant an inflation rate decrease of 0.9%. This would have wiped over 10% off the value of a 65 year old's pension.
LV='s head of pensions, Ray Chinn said any change would have led to a huge reduction in pensioners' buying power and quality of life.
He added: "Given that it is generally accepted that the RPI for older people is higher than the headline rate, and we've seen pensioners living costs rise by 33% since 2000, it remains crucial that people continue to make additional private provisions for a comfortable retirement."
In addition, Billy Burrows, director of Better Retirement Group said the decision was fair.
"It's the right decision for people because it wouldn't have been right if people had bought an [annuity] contract and it had been changed half-way through. In the past I've said one of the reasons why I'm not enthusiastic about RPI linked annuities is I've always thought the government had scope to change the underlying RPI basis.
"If they've removed that uncertainty, it may work and give people more confidence in their investments and RPI linked annuities in future."
This outcome provides welcome relief as annuity incomes continue to fall. Research from Moneyfacts has found the average annual income on a standard annuity fell by 11.5% during 2012, the largest income fall since 1998.
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