What's in your pension pot?
If you think your company pension will rise with inflation you might be in for a surprise, says Paul Lewis
People with company pensions that rise each year with inflation may believe they are protected from its ravages. Sadly, they are not. These pensions pay a proportion of your salary to you for life once you retire. But only part of it normally increases at all, and not always with inflation.
The law says that any pension payment calculated on your working time from April 1997 to April 2005 must be raised annually with inflation – but with a cap of five per cent. That’s less than half the current rate. Worse, the cap in the rise for pensions earned and paid for at work from April 2005 is half that – just 2.5 per cent. As for pensions earned before April 1997, forget it: there’s no legal obligation to raise them each year at all.
So if you have a pension from a job where you worked for 40 years, some may be flat-rate, some raised each year by up to 2.5 per cent and the rest by no more than five per cent. Yet inflation is expected to be over ten per cent well into next year.
Individual pension schemes can decide to raise pensions by more than these caps. Some have extended inflation-proofing backwards to cover pre-1997 pensions. Others raise them by more than one or other of the caps, especially when inflation is very high. But if your pension gets into trouble and is bought by an insurance company or taken over by the Government’s Pension Protection Fund then any annual rises will normally be cut to the minimum the law allows.
The rules are different for most schemes in public sector jobs such as the NHS, police, teachers and civil servants. Those pensions will rise with inflation, though usually using the lower measure of that: the Consumer Prices Index or CPI.
If you saved up into a money purchase scheme (also called a defined contribution scheme, personal pension or SIPP), then at pension age you may have used the fund you had saved to buy an income for life, called an annuity. The most popular are flat-rate with no inflation rises. But if you chose to buy one that goes up each year you’ll feel very lucky at the moment!
QUESTIONS? Send any questions to Paul.Lewis@radiotimes.com. Paul cannot answer you personally, but I will reflect them in his column.
