Most pensions increase
during payment (including the member's own pension and any
provisions provided for spouse or dependant). This is often referred to
as escalation.
The nature and frequency of any pension increases depend
primarily upon the type of pension scheme, and the rules of the
particular scheme.
A pension in payment may, for example, be increased so as to
offset or partly offset rises in the cost in living (for example,
by reference to the Retail Prices Index
(RPI)).
There are also a number of statutory requirements, outlining the
minimum pension increases payable by pension schemes in defined
circumstances which are explained in the sections below. From
April 2011, the statutory increases refer to the Consumer Prices Index
(CPI).
The exact level of pension increase can depend upon a
number of factors, such as:
- the nature of the pension scheme - is it a company pension
scheme or some form of individual arrangement, such as a personal
pension scheme?
- the dates you joined and left the scheme;
- the date the pension commenced payment; or
- the choices made by you at the time the pension is set
up.
Increases are sometimes limited to a maximum amount. Capping an
increase in this way is known as Limited Price Indexation
(LPI). This is common in private sector schemes, whereas
increases in public sector schemes tend not to be capped.
If you need further clarification, you can check the situation
in relation to your own pension scheme by examining scheme
documents (such as the pension scheme booklet), or by contacting
your pension scheme administrators.
Occupational Pension Schemes - Final Salary and Career
Average
Up to April 2011, The Pensions Act 1995 required occupational
pension schemes to provide increases to pensions in payment in line
with RPI to a maximum rate.
This requirement has now been amended, so that pensions in
payment must be increased in line with CPI, as follows:
- for benefits earned after 6 April 1997, the increase is limited
to 5%;
- for benefits earned after 6 April 2005, the increase is limited
to 2.5%.
However, for that part of the pension earned before 6 April
1997, while scheme rules may grant annual increases, there is no
legislation that requires schemes to increase this pension unless
the scheme was contracted-out of the State
Earnings Related Pension Scheme (SERPS).
The rules of contracting-out require that increases be applied
to the Guaranteed Minimum Pension
(GMP) as follows:
- no increase for GMPs accrued before 6 April 1988 (but increases
on these are paid by the government along with the State Pension
for those living in a country eligible for state pension increases
- click
here for a list of those countries); and
- for GMPs accrued between 6 April 1988 and 5 April 1997, the
annual rate of increase is the CPI, subject to a maximum of
3%.
We would stress however that these are only the minimum
requirements, and it is normally possible for the rules of company
pension schemes to provide for a higher level of pension
increase.
Occupational Pension Schemes - Money Purchase
For most benefits earned under money purchase occupational
pension schemes before 6 April 1997, there is no statutory
requirement for pension increases to be provided.
Members are normally however allowed to request annual pension
increases of (for example) 3% or 5% when their scheme benefits are
in the process of being set up, though this will reduce their
initial pension level.
For benefits earned under money purchase occupational pension
schemes after 6 April 1997, which came into payment before April 6,
2005, the Pensions Act 1995 required occupational pension schemes
to provide increases to pensions in payment in line with CPI to a maximum of 5%.
For occupational schemes contracted-out on a money purchase
basis, again for pensions which came into payment prior to the 6h
of April 2005, the part of the pension bought by contracted-out
contributions (known as Protected Rights) prior to 5 April 1997
must increase in line with the CPI, subject to a maximum of
3%. The pension bought by post 6th April 1997 protected rights
payments must increase in line with CPI capped at 5%.
There is no statutory requirement for pension increases to be
provided on benefits under money purchase pension schemes, which
come into payment after 6 April 2005 (though there might be such a
requirement under the pension scheme rules).
Personal and Stakeholder Pensions
For a large proportion of the benefits available on the personal
or stakeholder pension schemes, the level of pension increase
payable is chosen by the scheme member upon the setting up of the
benefits.
The higher the level of pension increase chosen, the lower the
initial pension level will be (as it costs more to provide a
pension, which increases in the future).
There are still however some statutory provisions that apply to
personal and stakeholder pension schemes. The increases (if any)
that apply to both are similar but there are differences. Each is
outlined below:
Stakeholder Pension Schemes
For trust-based stakeholder pension schemes (of which there are
very few), which came into payment before 6 April
2005, increases must be provided to pensions in payment in
line with CPI to a maximum of 5%.
For trust-based stakeholder pension schemes which come into
payment after 6 April 2005, there are no statutory requirements for
pension increases. Policyholders are free to choose the level
of increases applying in retirement.
Personal pension schemes
Since April 2005, there have been no statutory requirements for
pension increases. Policyholders are therefore free to choose
the level of increases applying in retirement.
Q & A's
Retirement prior to April 1997
The pension from a final salary scheme for a member who retired
prior to April 1997 comprises of 3 elements:
- Post 1988 GMP (earned between 6 April 1988 and 5 April
1997);
- Pre 1988 GMP (earned between April 6, 1978 and April 5, 1988);
and
- Non-GMP (benefits in excess of GMP).
Increases to post 1988, pre 1988 GMP and non-GMP are
different.
For post 1988 GMP and pre 1988 the member receives
inflation-proofed increases. However for post 1988 GMP the scheme
is responsible for only the first 3% of the inflation increase. If
inflation is less than 3% then the member will receive the increase
entirely from the scheme (which will be less than 3%). If inflation
is more than 3% then a 3% increase is paid by the scheme whilst the
remainder is added to the state pension.
For pre 1988 GMP the whole of the increase is paid by the state
as an addition to the state pension for those living in a country
eligible for state pension increases - click here for a list of those
countries.
For pension based upon service prior to April 1997 there is no
legal requirement for schemes to increase the non-GMP for pension
in payment (though there could be some provision for some increase
on this portion of the benefits under the pension scheme
rules).
Retirement after April 1997
The comments in relation to GMP above also apply. However, the
non-GMP pension is split between that based earned after April 1997
service and that based upon pre April 1997 service.
The element of non-GMP pension earned between 6 April 1997 and 5
April 2005 must increase by 5% per annum or the change in
the Consumer Price Index if
less.
For the remaining non-GMP pension (i.e. that based upon pre
April 1997 service) there is no legislative requirement compelling
schemes to provide increases (though again there could be some
provision for some increase on this portion of the benefits under
the pension scheme rules).
This requirement has recently been amended, so that that part of
the pension earned after 6 April 2005, only needs to be increased
in line with CPI, up to a maximum of
2.5%.
Again, it is possible that the particular company pension scheme
rules will provide for a higher level of increase.
The pension from a contracted out money purchase scheme will
comprise two elements:
- Protected rights; and
- Non-protected rights.
Protected Rights arise as a result of the scheme contracting out
of the additional tier of the government's state pension provision,
previously known as the State Earnings Related Pension Scheme
(SERPS), and now called the State Second Pension (S2P).
The pension in respect of Protected Rights contributions paid
prior to April 1997 must increase by 3% per annum or the change in
the Consumer Price Index if less. This increase is paid by the
scheme.
The pension in respect of all contributions paid between 6 April
1997 and 5 April 2005 must increase by 5% per annum or the change
in the Consumer Price Index if less. This increase is paid by
the scheme.
There is no statutory requirement for pension increases to be
provided on benefits under money purchase pension schemes (no
matter where they were earned), which come into payment after 6
April 2005 (though there could in theory still be such a
requirement under the pension scheme rules).
For a large proportion of the benefits available on the personal
or stakeholder pension schemes, the level of pension increase
payable is chosen by the scheme member upon the setting up of the
benefits.
The higher the level of pension increase chosen, the lower the
initial pension level will be (as it costs more to provide a
pension, which increases in the future).
There are still however some statutory provisions that apply to
personal and stakeholder pension schemes. The increases (if any)
that apply to both are similar but there are differences. Each is
outlined below:
Stakeholder Pension Schemes
For trust-based stakeholder pension schemes (of which there are
very few), which came into payment before 6 April
2005, increases must be provided to pensions in payment in
line with CPI to a maximum of 5%.
For trust-based stakeholder pension schemes which come into
payment after 6 April 2005, there are no statutory requirements for
pension increases. Policyholders are free to choose the level
of increases applying in retirement.
Personal pension schemes
Since April 2005, there have been no
statutory requirements for pension increases. Policyholders
are therefore free to choose the level of increases applying in
retirement.
No. The member chooses when selecting their benefits, whether to
include an allowance for any pensions arising from the schemes to
increase in payment.
If the member selects a pension, which increases in payment, the
initial amount will be lower.
The Basic State Pension is increased each April using the
increase in earnings, prices (CPI) or 2.5
per cent, whichever is highest.
The additional state pension amounts are increased in line
with CPI. The
increase is applied in the first week of the new financial year,
normally on the first Monday.
