Limited Price Indexation
The Pensions Act 1995 required pension schemes to provide increases on pensions in payment by 5% per annum or in line with the Retail Prices Index if this is less (know as Limited Price Indexation or LPI). This requirement applies to pensions in payment arising from occupational pension schemes and pensions in payment arising from protected rights under an appropriate personal pension or stakeholder plan. However, the LPI requirement only extends to pensions that were built up from 6 April 1997.
If you build or have built up a pension between 6 April 1997 and 5 April 2005, your pension plan must increase this pension when it is paid to you by 5% per annum or in line with the Retail Prices Index if this is less. That is the minimum increase allowed.
Any pension built up from 6 April 2005 in a salary-related scheme, however, only has to be increased when in payment by 2.5% per annum or in line with the Retail Prices Index if this is less.
Money purchase schemes do not have to increase pensions that come into payment from 6 April 2005 at all.
Scheme rules, however, might impose better rates of increase than the minimum requirements above.
- Does this mean I will be worse off than before?
No, there is no change to the pension benefits you have already earned. The changes only apply to future pension benefits built up from 6 April 2005.
- I have a pension credit from my former spouse's occupational pension scheme, how does this affect me?
Pension credits that were awarded prior to these changes are still required to provide increases at the lesser of the Retail Prices Index (RPI) or 5% per annum. However, credits arising from Pension Sharing orders after the changes become effective will be required to increase at the lesser of RPI or 2.5% per annum.
Q & As
