Deferred final salary pension annual increases

philng

I have a deferred DB pension that i can draw without reduction in 2 and half years when i reach age 60.

increases in deferment are in line with inflation up to a max 5% a year.

My question is when and how do these increases take place? Is it in one go at a set point in the year or apportioned through the year?

Just considering possibility of drawing early and have a quote from 4 months ago plus a quote at age 60 but wanted to understand whether timing of drawing makes a difference particularly with inflation so high currently.

in other words would i be better waiting say 6 months to get the full inflationary benefit and if inflation remains high this would influence whether i wait till 60 so the higher final pension benefits more from the inflation increase than the lower pension i would receive now which also increases by same max 5%.

Hope this makes sense?

The_Fat_Controller

Ask the scheme administrators, there isn't a one fits all answer.

sheslookinhot

A typical scheme has an inflationary increase, from Septembers escalation indice, applied in April following year. 

The_Fat_Controller

sheslookinhot said:

A typical scheme has an inflationary increase, from Septembers escalation indice, applied in April following year. 

Nope, every DB scheme will have different rules.

Our pensions are linked to RPI (lucky us) and I have a CPI element that stops when I reach UK pension age (66)

The annual increase is applied in April and is based on the previous January's inflation figures, so this year it was 7.8% and 5.5%

I am extremely fortunate that there is no cap on the percentage increases.

Albermarle

As said all schemes are different . Mine increased on July 1st and the increase on most of it is fixed at 5% , regardless of inflation.
Also there have been a number of recent threads that some deferred pensions may well rise more in line with inflation, than when the pension is in payment. So in the current high inflation period may well be best not to take them.

A study of the scheme rules is necessary.

NedS

The_Fat_Controller said:

sheslookinhot said:

A typical scheme has an inflationary increase, from Septembers escalation indice, applied in April following year. 

Nope, every DB scheme will have different rules.

and further to that, it is also possible to have different rules applying to different periods of service within the same scheme.

philng

Scheme says increases 1st April but doesn’t state which date inflation figure used. I assume it  is September but with cap at 5% its immaterial anyway based on current inflation figure. 

My thinking is the current £24000 a year pension at 60 will go up by more or less £1200 next April and then maybe again by similar amount in April 2024 if inflation persists so should be over £26k by time i get to 60.

NedS

philng said:

Scheme says increases 1st April but doesn’t state which date inflation figure used. I assume it  is September but with cap at 5% its immaterial anyway based on current inflation figure. 

Not necessarily - normally the cap is a compounded average over the period of deferment, so if you have previously had years with below 5% inflation, there may be scope to accommodate the full 10% (or whatever it is this year) increase within the 5% cap. There have been some recent threads on this topic.

zagfles

Firstly, don't confuse revaluation in deferment with indexation in payment, as some people seem to be doing above. They are totally different for almost all schemes (at least in the private sector, not sure about public).

See https://www.barnett-waddingham.co.uk/comment-insight/blog/revaluation-for-early-leavers/ for a summary. But basically, other than GMP, statutory revaluation in deferment is based on whole years, using Sept inflation rate compounded, and capped on the overall inflation rate over the period (so a one off high inflation year should not be capped).

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

The "lower" column is because the cap was reduced in from 5% to 2.5% in 2009 (the Labour govt's last desperate attempt to save DB pensions in the private sector) but that only applies to service from 2009.

Some schemes are more generous, eg use RPI still instead of CPI.

See these thread and the thread linked from it:

https://forums.moneysavingexpert.com/discussion/6381145/deferred-db-pension-revaluation-are-the-5-2-5-limits-compounded-also-partial-years/p1

https://forums.moneysavingexpert.com/discussion/6381845/understanding-occupational-pensions-revaluation-orders-2-5-cap

philng

zagfles said:

Firstly, don't confuse revaluation in deferment with indexation in payment, as some people seem to be doing above. They are totally different for almost all schemes (at least in the private sector, not sure about public).

See https://www.barnett-waddingham.co.uk/comment-insight/blog/revaluation-for-early-leavers/ for a summary. But basically, other than GMP, statutory revaluation in deferment is based on whole years, using Sept inflation rate compounded, and capped on the overall inflation rate over the period (so a one off high inflation year should not be capped).

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

The "lower" column is because the cap was reduced in from 5% to 2.5% in 2009 (the Labour govt's last desperate attempt to save DB pensions in the private sector) but that only applies to service from 2009.

Some schemes are more generous, eg use RPI still instead of CPI.

See these thread and the thread linked from it:

https://forums.moneysavingexpert.com/discussion/6381145/deferred-db-pension-revaluation-are-the-5-2-5-limits-compounded-also-partial-years/p1

https://forums.moneysavingexpert.com/discussion/6381845/understanding-occupational-pensions-revaluation-orders-2-5-cap

Wow this is very interesting.

Would make a significant difference in decision as to whether to leave until NRD at age 60 in 2 years 6 months or whether to draw early.

None of this is explained in scheme rules.

Scheme is Lloyds Bank no 1 defined benefit scheme.

So my current deferred pension at age 60 may increase at a much higher rate in times of high inflation than the pension i would receive now say £22k which would be capped at 5%.

philng

Just checked scheme rules.

So pension in payment is capped at 5% each year using RPI.

Pension in deferment is increased by a max of 4% using CPI compound.

Date of leaving was 30/6/16 and my NRD is 16/1/25. Does this mean there would be an optimum date to draw pension?