MEMBERS of final-salary pensions who move jobs could be thousands of pounds worse off in retirement after the government proposed halving the rate at which benefits increase in the run-up to retirement.

The move could slash a quarter off some retirement funds.

By the government’s own conservative estimates, about 5m people have deferred pensions, after leaving their employer but keeping their benefits in their previous final-salary scheme.

By 2050 pension savers could have missed out on £4.4 billion of extra income and benefits.

However, advisers stress that any pension benefits already built up under the existing system will not be affected.

What is the controversy about?

Under current rules, deferred pensions are adjusted upwards for inflation each year up to a cap of 5%. But the government wants to slice the cap to 2.5%.

Pension increases are generally linked to the retail prices index (RPI), which rose to 3.9% in September.

If inflation stays at these levels and benefit increases are capped at 2.5%, the value of these pensions will be eroded over time.

How much could I lose out?

Employees in their mid40s who switch companies could lose 25% of expected benefits by the time they turn 65, if inflation is at 4%, according to insurer Standard Life.

A typical scheme pays one 60th of your final salary for each year of service.

So if you work for a company for 15 years and are earning £40,000 when you leave at 45, your pension benefit would be worth 15/60ths of the £40,000 – £10,000 a year.

Under the current rules it would be increased each year by RPI up to a maximum of 5%. If inflation is 4% each year you would get £21,911 a year at 65. If the annual increase is capped at 2.5% you would get £16,386 a year at retirement – £5,525 less.

The government estimates that inflation will be at 2.9% long term so even if losses are not as great as Standard Life suggests, recipients of deferred pensions could see their pensions’ buying power shrink dramatically.

Who is at risk?

Anyone who leaves a company with a final-salary scheme, or who takes a long career break. Women are at risk if they have time off to bring up children.

Are existing benefits affected?

No. If you have already deferred a pension, benefits accrued under the old rules are protected.

Why does the government think this is necessary?

The fact that we are all living longer has pushed up the cost of final-salary pensions, and the uprating of deferred pensions by up to 5% is a burden.

The government says that the present rules were introduced in 1986 after a period when double-digit inflation had been the norm.

Labour hopes its changes will help more final-salary schemes stay open as they will be cheaper to run.

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