New pensioner only receiving part of an increase

pimento

I've been taking my occupational pension since April 2022 and have just received notice of this year's increase.  The pension year runs from July 1st and the letter I've received states that because I've been taking my pension for less than 12 months, I'll only be receiving an increase based on the number of months I've been taking my pension.
My scheme administrators are notoriously difficult to contact and I've had no reply from them as yet but a Google tells me this calculation isn't uncommon but nowhere I can find tells me why some schemes do this.
Does anyone know and can explain it to me, please?

jimi_man

It's very common and straightforward. If the CPI increase is 10% in a year and you've only been receiving your pension for six months, then you'll only get half the increase. It's worked out pro rata.

pimento

Thanks.  So if I'd deferred taking my pension until today (July 1st) instead of April 1st, the amount of my pension would have had the full % increase applied?

Dazed_and_C0nfused

Possibly but would that be worth more than the 3 monthly payments you'd have lost?

pimento

Dazed_and_C0nfused said:

Possibly but would that be worth more than the 3 monthly payments you'd have lost?

No but possibly the increase in the TFLS might have gone some way to closing the gap.  My pension isn't huge and this year's increase will be the grand sum of £235...

MX5huggy

pimento said:

Thanks.  So if I'd deferred taking my pension until today (July 1st) instead of April 1st, the amount of my pension would have had the full % increase applied?

No it would have had no % increase applied. 

Presuming this is a DB pension, it would have some method of increasing before payment, which could be different from the method once in payment or the same.

pimento

..and I'm still not clear why they do it.  If I'd started work in April and a pay rise had been given to everyone in July, I would have received all of it not a pro-rata amount.  I'm not clear why a pension is different.

hugheskevi

pimento said:

..and I'm still not clear why they do it.  If I'd started work in April and a pay rise had been given to everyone in July, I would have received all of it not a pro-rata amount.  I'm not clear why a pension is different.

There are 2 key dates - when you leave service and when you start pension (and they may be different or they may be the same if you retire from active service). Your pension is inflation protected from the time its value is calculated upon leaving service.

If you do not draw pension immediately upon leaving, your pension entitlement is calculated as at last day of service and then revalued until you draw the pension. The revaluation ensures the pension retains its real value, value, subject to scheme rules until you draw your pension.

Once the pension is drawn, indexation applies. The point of indexation is to ensure the pension retains its real value, subject to scheme rules, until you die.

Indexation is applied from the point you start to receive pension, with an increase each year. If someone in the scheme started to receive their pension on 1 July 2021 they would receive the full inflation increase and their pension would retain its real value from year to year. If you received the same full increase despite the pension coming into payment many months later your pension would be increased by an amount above inflation over the three months you have received the pension. Hence to correctly protect your pension in real terms the increase is pro-rata.

This can mean quite a large number of people close to retirement may be better off leaving their scheme early to get revaluation/indexation if their salary is not increasing in line with inflation, but most don't engage with the details of their pension to be able to consider whether this would apply to them or not.

pimento

Ah, yes, now I understand.  Thank you Hugh for that excellent explanation.
If only my pension administrators had explained like that.

Marcon

hugheskevi said:

pimento said:

..and I'm still not clear why they do it.  If I'd started work in April and a pay rise had been given to everyone in July, I would have received all of it not a pro-rata amount.  I'm not clear why a pension is different.

There are 2 key dates - when you leave service and when you start pension (and they may be different or they may be the same if you retire from active service). Your pension is inflation protected from the time its value is calculated upon leaving service.

Be aware that inflation protection (at least in virtually all private sector schemes) is limited. You don't get full inflation proofing, so don't expect to see double-digit increases, either while the pension is revaluing in deferment or once it is in payment, unless the scheme rules are considerably better than statutory requirements.

hugheskevi said:

If you do not draw pension immediately upon leaving, your pension entitlement is calculated as at last day of service and then revalued until you draw the pension. The revaluation ensures the pension retains its real value, value, subject to scheme rules until you draw your pension.

Pensions are not revalued until they start to be drawn. Increases in deferment are based on whole years, not years and part-years. See https://www.barnett-waddingham.co.uk/comment-insight/blog/revaluation-for-early-leavers/ for a full explanation.

pimento

Marcon said:

hugheskevi said:

pimento said:

..and I'm still not clear why they do it.  If I'd started work in April and a pay rise had been given to everyone in July, I would have received all of it not a pro-rata amount.  I'm not clear why a pension is different.

There are 2 key dates - when you leave service and when you start pension (and they may be different or they may be the same if you retire from active service). Your pension is inflation protected from the time its value is calculated upon leaving service.

Be aware that inflation protection (at least in virtually all private sector schemes) is limited. You don't get full inflation proofing, so don't expect to see double-digit increases, either while the pension is revaluing in deferment or once it is in payment, unless the scheme rules are considerably better than statutory requirements.

hugheskevi said:

If you do not draw pension immediately upon leaving, your pension entitlement is calculated as at last day of service and then revalued until you draw the pension. The revaluation ensures the pension retains its real value, value, subject to scheme rules until you draw your pension.

Pensions are not revalued until they start to be drawn. Increases in deferment are based on whole years, not years and part-years. See https://www.barnett-waddingham.co.uk/comment-insight/blog/revaluation-for-early-leavers/ for a full explanation.

Indeed.  I've been advised that our increase this year is being based on "CPI UN" rather than the RPI it has previously been based on.  I had to Google it and I still don't know why.  I expect it's because CPI UN is lower than RPI.