During his Spending Review last month, Chancellor Rishi Sunak confirmed that the Retail Price Index (RPI) will be replaced by the Consumer Prices Index including owner occupiers’ housing costs (CPIH) in 2030.
The removal of the RPI metric, which is used to calculate inflation increases for financial products, could cost savers up to £96 billion, according to some estimates and is likely to affect some financial products more than others.
In total, more than six million people could be affected by the move, with pensions savers and investors most likely to lose out from the change.
This is because the measures are calculated differently and CPIH tends to be about 0.8 per cent lower than RPI.
While scrapping the RPI will help with everyday items such as train tickets, flight tax, car tax, tobacco and alcohol duty and mobile phone tariffs, it will have a significant impact on final salary pension schemes and annuities. These are typically calculated using RPI, which means payments will rise more slowly.
The Government has previously calculated that it could save £90 billion from using the CPIH, which takes into account its own savings from pensions and investments.
However, estimates published earlier this year by the Association of British Insurers (ABI) suggest the overall negative impact of a switch from RPI to CPIH in 2030 would be £96 billion for the savers affected.
As an example, the Pensions Policy Institute has calculated that the move would cost each male, final salary, pensioner £6,000 on average.