Interest rate

The government confirmed this week that the Retail Price Index (RPI) will be scrapped by 2030 and replaced by the Consumer Prices Index including owner occupiers’ housing costs (CPIH), the government’s official measure of inflation.

RPI is a legacy index that’s been gradually phased out for some time, but the measure still appears in a wide spectrum of long-term contracts.

From a consumer perspective, increases in regulated rail fare, mobile phone tariffs, vehicle excise duty, air passenger duty, tobacco and alcohol duty and the interest on student loans are all linked to the increase in RPI at the moment.

RPI is higher than CPIH (in October 2020, RPI was 1.3% while CPIH was 0.9% for example), which means each year the prices for these linked products increases more under RPI than under CPIH.

RPI being swapped out is of course great news for the vast majority of consumers – the prices of products previously linked to RPI will in future increase at a slower rate.

However, for those with certain types of pensions and investments, it will be bad news.

If your pension was previously linked to RPI for example, over a lifetime your pot will be expected to grow significantly slower under the CPIH model, leaving you with a much smaller pot at the end.

It’s expected to hit those with final salary pensions or annuities (a type of guaranteed income pension product) particularly hard, although the former is already becoming a rarity.

Those with some index-linked gilts (a type of bond) will also see the value of their investment fall under the new system.

The government, meanwhile, has said that there would be no compensation available for gilt holders affected.

What it means for you…

How the withdrawal of the RPI will affect you will very much depend on your age bracket and possibly your income.

For most consumers, it will be a benefit – price increases will be slower over time once the switch is made.

But for those with pension or investment products linked to RPI, it can obviously be worrying as you approach a pensionable age.

If you are affected, it’s worth talking to a financial planner who may be able to advise on the best course of action for your situation.