People in Edinburgh react to news of Sir Fred's new lower pension
Former Royal Bank of Scotland chief Sir Fred Goodwin has done "the right thing" in reducing his controversial pension, the chancellor has said.
Sir Fred has agreed with RBS to reduce his pension by £200,000 a year. The government has also accepted the deal.
He had already reduced his £703,000 pension by taking a lump sum of £2.7m. He will now receive £342,500 a year.
RBS chairman Sir Philip Hampton said it marked a "very substantial reduction" but unions called it a "small gesture".
The government has a say in the pension deal because it owns 70% of RBS as a result of a £20bn bail-out.
Chancellor Alistair Darling said he was "very glad" the matter had been resolved.
"I think that Sir Fred, in handing back part of his pension, is doing the right thing," he said.
Sir Fred had offered to cut his pension after the threat of legal action from RBS.
However, there may still be criticism of the deal, because it will leave the former chief executive with a bigger pension than he would have received if he had been dismissed, instead of leaving on agreed terms.
The size of Sir Fred's pension has changed over the past few months:
• In October 2008, Sir Fred agreed to resign from RBS at the request of the board, rather than being sacked, enhancing the value of his pension pot from £10.2m to £16.6m, and giving him the equivalent of £693,000 a year
• In January 2009, by working one extra month, the pension rose to £703,000 a year
• In early 2009, he took a lump sum of £2.7m - tax free cash he could spend straight away. As a result, his annual pension was reduced to £550,000
• Now he has offered to forego £4.7m, or £200,000 a year, leaving him with an annual pension of £342,000. His offer has been accepted by RBS and the government.
'Life of luxury'
There has been widespread public and political anger over the size of Sir Fred's pension after the bank had to be rescued by the government.
"This pension arrangement became a symbolic issue, and the focus of unprecedented media and political attention," he said in a statement.
"It had to be fixed to allow everyone to focus our energies where they should be, on getting the company back to health."
RBS also said it had concluded a review into Sir Fred's conduct in relation to expenses and use of company assets and had found "there was no wrongdoing or other misconduct on Fred Goodwin's part in this regard that would justify reducing the pension".
However, BBC business editor Robert Peston says RBS was advised that there was a reasonable legal basis for suing him for the return of some of the pension pot.
Sir Philip Hampton told Sir Fred he was happy to see him in court, our correspondent says.
Labour MP John Mann, who sits on the House of Commons' Treasury Committee, told the BBC Sir Fred's decision was "an important breakthrough" and hoped other bankers would follow suit.
But Vince Cable, the Liberal Democrat Treasury spokesman, said: "From the point of view of public opinion, this is a very weak outcome and probably one that Sir Fred is very comfortable with."
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