If you are in a money purchase (DC) pension plan of any kind, you will need to choose whether you buy an annuity which goes up each year or one which stays flat. It may not be possible to find an annuity which fully matches inflation – typically, you can choose an increase capped at 3% or 5% a year.
Most salary related schemes will up-rate your pension (and any dependant’s pension following your death) each year. This is sometimes known as “escalation”.
The law on pensions increases has changed a number of times. There is no legal requirement to increase pensions built up before 1997, though in practice most schemes do provide increases. Pensions built up from 1997 to 2005 must be increased in line with the Retail Price Index (RPI) to a maximum of 5% (sometimes known as Limited Price Inflation or LPI). On pension built up since 2005, the legal requirement is reduced to a cap of 2.5%. Depending on the scheme rules, increases may be linked to the Retail Prices Index or to the Consumer Prices Index.
In 2010 the Government changed the statutory requirement to pay increases based on the Consumer Price Index (CPI). If your scheme rules simply require the scheme to follow the legal requirement, CPI will therefore be used for increases from January 2011. If however the requirement for RPI-linked increases is written into the scheme rules, then the trustees will have to follow that unless or until scheme rules are changed. In some schemes which have different benefit structures for different members (e.g. because the company has acquired other companies and merged the pension schemes) different members may end up with different increase rates.
If you do not know what your scheme provides, you should ask your pension scheme administrator.
