Goodwin offers £4.7m cut in pension

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The bank's disgraced ex-chief executive "volunteered" to reduce his pension payout from £555,000 to £342,500 a year, said RBS.

Sir Fred's pension deal sparked public outrage, leaving him with a £703,000-a-year package - including a £2.7 million lump sum - despite leading the bank to the brink of disaster.

He has previously refused to give up any of his entitlement but is thought to have been under pressure amid the threat of legal action from RBS.

However, RBS claimed he approached the bank himself after being cleared by a recent internal inquiry into his conduct and pension arrangements.

The concession will see the total value of his pension pot fall by £4.7 million, described by the bank as "an acceptable amount to all parties".

Chancellor Alistair Darling said: "I'm very glad that RBS have now resolved the matter with Sir Fred Goodwin. I think that Sir Fred, in handing back part of his pension, is doing the right thing."

Prime Minister Gordon Brown said: "It is right that Sir Fred Goodwin paid back at least some of the money. This was the discretionary element agreed by the RSB before he left.

"For the future, it is really important that we have a proper system of bonuses and rewards. It will be very important that the systems on which these rewards are based are far more transparent and open than they have been in the past."

RBS is now more than 70% owned by the taxpayer after being hammered by the financial crisis. It reported record UK losses in 2008 and tens of thousands of staff have lost their jobs.