Worried about decreasing value of DB pension with inflation so high

JDK1971

Hi Everyone

I was wondering what other people’s views are on deferred DB pensions losing value in real terms due to inflation?

I have a mixture of pensions ( DC&DB).  My DB pension was meant to provide a decent proportion of my post 67 income along with the state pension which I can take in 13 years time.  The DC pension is meant to bridge the gap allowing me to retire early.

However, I’m getting quite worried as inflation has been in excess of 10% for a while now, and the rules of our scheme are particularly tight in that deferred members pension increases are capped at 2.5%.  I worry that the value will not really be enough in 13 years time as it is now.

Does anyone have any views as to whether I should be worried, or whether it will correct itself in some way I haven’t factored in?

Marcon

JDK1971 said:

Hi Everyone

I was wondering what other people’s views are on deferred DB pensions losing value in real terms due to inflation?

I have a mixture of pensions ( DC&DB).  My DB pension was meant to provide a decent proportion of my post 67 income along with the state pension which I can take in 13 years time.  The DC pension is meant to bridge the gap allowing me to retire early.

However, I’m getting quite worried as inflation has been in excess of 10% for a while now, and the rules of our scheme are particularly tight in that deferred members pension increases are capped at 2.5%.  I worry that the value will not really be enough in 13 years time as it is now.

Does anyone have any views as to whether I should be worried, or whether it will correct itself in some way I haven’t factored in?

Deferred pension increases are capped at  average levels of increase over the whole period of deferment, so years which were below the maximum will be 'improved' by years where this maximum was exceeded.

You say inflation has been 'in excess of 10% for a while' but in truth only a relatively short while - and inflation is widely expected to fall soon.

JDK1971

Ah, ok. I thought each year’s increase was applied at the end of the year, and baked into the new value.  Thanks for correcting me.

leosayer

From looking at the pension reval table (column 3 for the 2.5% uplift) linked below,  it seems that the 2.5% cap has already been reached on a compounded basis for those who deferred after 2009. 

In other words, unless we have a period of inflation below 2.5%, all future deferred pension increases will be capped at 2.5% in the same way as a pension in payment.

If you compare column 2 (5% cap) to column 3 (2.5% cap) then you can see some meaningful impact of the 2.5% cap on those who deferred in 2010, 2011, 2015, 2016, 2017, 2018, 2019, 2020, 2021 and 2022.

https://www.legislation.gov.uk/uksi/2022/1229/article/2/made