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Inflation rate change for private sector retirement benefits

The Government has announced plans to change the rate at which private sector pensions are increased each year.

Pensions Minister Steve Webb has called for the schemes to rise each year in line with inflation as measured by the consumer prices index (CPI), rather than the retail prices index (RPI).

The move, which is expected to be introduced next year, would bring the inflation measure used for private sector pensions in line with public sector ones.

The Government also recently announced that benefits and the state pension would rise in line with CPI rather than RPI in future.

CPI is considered to be a more appropriate measure of inflation for pensioners, as it excludes housing costs, such as mortgage interest, which retired people are less likely to pay.

But the move is likely to cost workers hundreds of pounds a year over the course of their retirement, as CPI is generally lower than RPI.

The Government also announced that benefits paid by pensions safety net the Pension Protection Fund and the Financial Assistance Scheme would also rise in line with CPI rather than RPI in future.

The move is good news for beleaguered final salary schemes, as the lower rate at which pensions have to increase each year will reduce the liabilities they face."