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New index but pensions safe

The retired and savers have been spared a radical attack on their personal finances that could have seen them lose out on thousands of pounds.

Many older people enjoying their retirement would have lost out significantly over the course of a typical 20-year retirement fund had, as had been widely speculated, a change been made to the key inflation measure, the Retail Prices Index (RPI).

It would have meant the index would rise at a slower rate, causing pensions and investments to do the same.

But in a climbdown, the Government's independent Office for National Statistics (ONC) announced there are no plans to change the measure and index-linked pensions and investments will not lose out.

Saga described the decision as "excellent news".

Ros Altmann, director general of the older people's organisation, said: "To have radically changed the traditional inflation measure, on which many people's incomes depend, could have jeopardised the inflation protection inherent in many people's income arrangements."

The RPI is linked to a wide variety of retirement incomes, as well as rail fares, student loans and national debt and a small percentage change to the rate would knock thousands off a typical retirement income's value.

Jil Matheson, the UK National Statistician, said the index should be maintained due to its "significant value" to index-linked bond markets.

Glasgow-based pensions expert Alan Collins, head of Corporate Advisory Services at Spence and Partners, said: "The announcement means pension scheme funding levels will not receive the expected boost.

"Security for members of underfunded schemes will not improve and there will be no relief to the sponsors of these schemes.

"On the positive side, the announcement will mean pensioners will retain the current value of their RPI-linked pension. A change could have meant their pensions would have been worth thousands of pounds less.

"Investors in RPI-linked investment will also not suffer losses to future income."

Despite her decision to maintain the RPI, Ms Matheson claimed the method used to calculate the rate does not meet international standards and revealed a new index will be created to sit alongside the RPI.

The new index, called RPIJ, will be created from March using a different calculation method for the price of goods and will be closer aligned to the UK's benchmark level of inflation, the Consumer Prices Index (CPI).

RPIJ may be used to help calculate clothing prices, as the RPI method is felt to be outdated for that purpose.

Financial expert Philip Shaw, economist at Investec Securities, added: "We are surprised that the ONS has rejected the opportunity to fix the well-discussed flaws in the RPI and are a little dismayed that we will have yet another measure of inflation to contend with."

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