Retirees and savers could miss out on the thousands as a result of an announcement published alongside the spending review.
The change will cost £ 122 billion from the pockets of retirees and savers, reports the Spiegel Online.
However, others can take advantage of those who currently pay for things where the price is tied to the Retail Prices Index (RPI) – such as cell phone rates and train fares.
Millions of people are currently seeing their retirement benefits and savings rise every year in line with the RPI.
Nevertheless, it has now been announced that from 2030 onwards, that measure of inflation will be replaced by something comparable to the Consumer Price Index, which is usually about 0.8 percent lower.
That means that someone whose initial pension is £ 10,000 can lose about £ 5,000 within 30 years.
The change will not take effect until 2030 and there will be no compensation for those who miss.
Things that are currently linked to RPI include: final salary pension benefits; income from indexed annuities; income from some indexed bonds; and regulated rate hikes (and wage bargaining for railway workers).
Other issues associated with it include mobile phone price increases (the maximum increase allowed without giving you the right to leave the contract prematurely); excise duty on vehicles (more commonly known as motor vehicle tax); passenger tax increases; the excise duty on tobacco and alcohol is increasing; and interest on student loans.
Tom Selby, senior analyst at AJ Bell, said, “The message is unequivocal: if you’re being negatively affected by this, be tough.
“The government is clear that it will not provide any form of compensation to those who lose as a result.”
Employees in final pay schemes can also be affected.
“It looks like millions of defined benefit plan participants have their pensions linked to RPI,” Selby said.
“In addition, those who have bought annuities from insurance companies that promise annual RPI inflation promises will also be slightly hit.”
The Association of British Insurers estimates that the move could cost investors and retirees £ 122 billion – and harm retirees in particular.
Steven Cameron, Aegon’s pension director, said: “With people living longer, retirement can last 30 years and while 0.8 percent may not seem like much, it can make a big difference in 30 years.
“A person whose initial pension is £ 10,000 would receive a compound increase of 3 percent per year at £ 24,273 in 30 years, but an increase of 2.2 percent would be £ 19,209 or a fifth less.”
Sarah Coles, personal finance analyst Hargreaves Lansdown, said, “This is a terrible blow to retirees, who will pay the lion’s share of the eye-watering cost of this move.”
However, not everyone will lose.
However, disposing of RPI could be good news for some young people and commuters.
Why? That’s because the government is linking things like train ticket increases and student loan repayments to RPI.
Increases in a range of taxes are also linked to the old measure – including motor vehicle tax, air passenger tax and fuel tax – so savings can be made there too.
Many mobile phone contracts also allow “inflation-linked” increases every year.
So the change allows people to save money that way too.