Understanding Occupational Pensions Revaluation Orders, 2.5% cap

NedS

I'm just trying to clarify my understanding of how the 2.5% cap will work for the Occupational Pensions Revaluation Orders of final salary pensions over the next couple years where single year inflation exceeds the cap.

I have a small final salary pension in deferment for 6 years capped at 2.5%.

From the current revaluation tables (2021):

https://www.legislation.gov.uk/uksi/2021/1308/made

1st January 2016 - 31st December 2021    12.3%    12.3%
1st January 2017 - 31st December 2021    11.1%    11.1%
1st January 2018 - 31st December 2021    7.9%    7.9%
1st January 2019 - 31st December 2021    5.4%    5.4%
1st January 2020 - 31st December 2021    3.6%    3.6%
1st January 2021 - 31st December 2021    3.1%    2.5%

Current revaluation is 12.3%. Calculating the cap for next year (then 7 years deferred), I assume I use (1 + 2.5% + 2.5% + 2.5% + 2.5% + 2.5% + 2.5% + 2.5%) = 18.87% (i.e, it compounds over the 7 years?)

If inflation for this year is 10%, the most my deferred pension can increase to would be up from 12.3% to the cap of 18.87%, about 6.6% for this year, and then extrapolating again for the following year, the maximum increase would be around 3% (assuming inflation is again above the 2.5% cap).

Have I understood correctly how the cap works?

snowlaser

Yes - I believe you have understood it correctly.

zagfles

Yes, although for service pre 2009, the cap is 5%. It's 2.5% for service from April 2009. 

For the 2.5% cap you're showing the percentages added but the total compounded looks correct ie (1.025)^7 - 1

NedS

zagfles said:

Yes, although for service pre 2009, the cap is 5%. It's 2.5% for service from April 2009. 

Indeed, although in my case all service was post 2009 and capped at 2.5%

zagfles said:

For the 2.5% cap you're showing the percentages added but the total compounded looks correct ie (1.025)^7 - 1

Thank you - a more elegant mathematical expression than the technically incorrect one I wrote (missing a lot of brackets)