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Pensions in payment

Annual increases

Your pension may increase each year when in payment. This helps protect the spending power of your money. The increases vary depending on whether you are in a defined contribution or defined benefit scheme. In addition, different schemes have different rules and some increases are discretionary, not a legal right. In some cases, you have the option to decide whether you want your pension to increase.

Increases to pensions from defined benefit schemes

Different levels of increase apply to different parts of your pension, depending on:

  • the rules of your scheme;
  • the period of service it relates to; and
  • whether part of your pension is in respect of contracting out of the State Earnings Related Pension Scheme. This is called a Guaranteed Minimum Pension (GMP)

Each year, your scheme must increase your pension (above your GMP) as follows:

  • any pension built up after 6 April 1997 is increased in line with the consumer prices index (CPI) or 5%, whichever is lower
  • any pension built up after 6 April 2005 is increased in line with the consumer prices index (CPI) or 2.5%, whichever is lower.

However, your scheme does not have to increase any part of your income built up from savings made before 6 April 1997, except for the GMP.

These are the minimum increases that your scheme has to pay, by law. Your scheme may increase your pension above these levels. These additional increases may be set out in the scheme rules or paid on a discretionary basis. Where it is the latter, the scheme has no obligation to continue to apply the increases.

If you have GMP, it must currently be increased each year as follows:

  • GMP built up before 6 April 1988 is not subject to a statutory requirement to be increased*
  • GMP built up from 6 April 1988 to 5 April 1997 is increased by the scheme up to a cap of 3%**.

*Increases by CPI related to your GMP will be paid via increases to your State Pension only if you reached State Pension Age prior to 6th April 2016

** Where CPI is above 3%, the excess will be paid via increases to your State Pension only if you reached State Pension Age prior to 6th April 2016.

 

Increases on pensions from money purchase workplace schemes

If your pension came into payment before 6 April 2005, each year:

the part of your pension coming from your pot built up after 6 April 1997 must increase each year in line with the consumer prices index (CPI) or 5%, whichever is the lower; and
if your scheme was contracted-out:

  • the part of your pension, if any, coming from your contracted-out contributions paid before 5 April 1997 must increase each year in line with the consumer prices index (CPI) or 3%, whichever is lower; and
  • the part of your pension, if any, coming from your contracted-out contributions paid after April 1997 must increase each year in line with the consumer prices index (CPI) or 5%, whichever is lower.

These are the minimum increases that your scheme has to pay, by law. Your scheme may increase your income above these levels.

There is no legal requirement for increases to be paid on:

  • income coming from your pot from savings built up before 6 April 1997, unless you were contracted out; and
  • income coming into payment after 6 April 2005.  

You will normally be able to ask for your income to be set up with annual increases, but this will reduce your initial pension.

 

Increases from personal pensions, stakeholder pensions and SIPPS

Normally, you choose the level of increase you want when you open your pot. The higher the increase you choose, the lower your initial pension will be. Click here to find out more about your choices when you open your pot .

A few stakeholder schemes were set up under trust. In this case, if your pension came into payment before 6 April 2005 it has to increase each year in line with the consumer prices index (CPI) or 5%, whichever is lower.

 

Increases to pensions coming from AVCs or FSAVCs

There is no legal requirement for increases to be paid. You choose the level of increase you want when you open your pot.

 

Increases to State Pensions

Click here for information on increases to State Pensions.

 

Frequently asked...

Where can I find out more?

If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.

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