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Former RBS chief Sir Fred Goodwin has agreed to hand back a large chunk of his controversial pension payout - but only after banking a multi-million pound lump sum.

Sir Fred - blamed for the shock downfall of RBS - had refused to back down on a deal that would have seen him take home around £700,000 a year.

The new agreement, revealed exclusively by Sky's Jeff Randall, will see the shamed banker pocketing £342,500 a year.

But it has also emerged that Sir Fred successfully banked a £2.7m lump sum from his original payout in February.

That reduced his annual payment to £550,000, before today's announcement.

RBS, which is 70% owned by the taxpayer, said Sir Fred's offer to make "a substantial reduction" was "acceptable" to both the bank and the Government.

Chancellor Alistair Darling said he was pleased the matter was now "resolved".

"On any measure this represents a very substantial reduction to Fred's pension and is an acceptable amount to all parties to the discussion," said RBS chairman Philip Hamilton.

"This pension arrangement became a symbolic issue."

Randall said Sir Fred had waited to act until an RBS inquiry into his behaviour was completed.

That probe exonerated him of "illegal or immoral" behaviour, Randall said.

"There was no conduct on Fred's part that would justify reducing the pension," RBS confirmed.

Randall also said Sir Fred, dubbed Fred the Shred for his cost cutting drives, wanted to return to public life.

"Clearly the Government has been breathing down his neck but I think it's more public pressure and how Sir Fred will have to live his life," said Randall.

"I do not think he wants to be a pariah, he does not want to have to disappear forever and I think he thinks he still has a contribution to make to business life."

Sir Fred's initial insistence that his £16.6m pension be honoured prompted anger from the public and politicians all the way up to Prime Minister Gordon Brown.

The former chief went to ground during the row and apart from a showing before MPs, he has not been seen in public since.

Tens of thousands of RBS staff have lost their jobs in the mean time.

Unions reacted with anger to the compromise pension deal.

Rob MacGregor, Unite national officer, said: "For the diabolical failure by Fred Goodwin which led to the near collapse of RBS, this small gesture represents only a fraction of the massive pension that he is walking away with.

"Goodwin will still enjoy a very comfortable future at the expense of the taxpayer."