From 1 May index-linked savings certificates from NS&I will start tracking the Consumer Price Index (CPI) instead of the Retail Price Index (RPI).
With the CPI measure of inflation typically 1% lower than RPI, the move will see some 507,000 savers earn a lower rate of return on their cash.
For example, over the last decade £10,000 in an account that tracked RPI would now be worth £13,113. However, had it tracked the lower CPI it would only be worth £12,520 – a loss of £593, according to figures from Hargreaves Lansdown.
The switch will save the government-backed savings institution £610 million in interest payments over the next five years according to the investment platform.
NS&I confirms the change won’t affect existing certificates until the end of their term and will only apply to certificates renewed on or after 1 May.
If you have a certificate that automatically renews for the same term you will have the right to cancel it within 30 days of the renewal date.
Although new index linked savings certificates have not been available to purchase since 2011, existing account holders are still able to renew them when they mature.
Commenting on the change, Sarah Coles, personal finance analyst at Hargreaves Lansdown says: “It’s a major blow to savers who have seen these products as reliable long-term partners in the battle against inflation.
"Like many long-term partners, these savers have already had to accept their certificates becoming less generous over the years. Savers renewing at the moment get the index link plus 0.01% - whereas nine years ago they got 1% on top of the index link.”
However, Ms Coles says savers shouldn’t dismiss the accounts altogether. “These certificates are still essential tools for savers, because they guarantee to beat inflation, and are 100% backed by the government, so offer real reassurance in a portfolio,” she adds.
The certificates which are issued with two, three and five-year terms, are also free of UK income tax when they mature.
CPI and RPI both measure inflation tracking the changes in price of a representative basket of goods and services over time.
The main difference between the two is that CPI does not include costs associated with your home such as mortgage, rent and council tax, however there are also differences to the way the calculations are made.
RPI ceased to be a ‘national statistic’ in 2013. It is still, however, used by the UK Treasury in some cases. CPI is more commonly used, but has now also been superceded by CPIH, which includes housing costs, as the 'lead' measure by the Office for National Statistics.