Will my pension increase once I have retired?

If you are in a 'money purchase' (DC) pension plan of any kind, you may choose to buy an annuity with your pension pot (perhaps after taking your 25% lump sum) which will provide a pension for the rest of your life. This is not your only option (rules on how you can use your pension pot have been relaxed) but an annuity can still provide a guaranteed pension for life.

If you are buying an annuity, you will need to choose whether you buy one that goes up each year or one that 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 RPI or to the Consumer Prices Index (CPI). In 2010, the government changed the statutory requirement to pay increases based on the 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.

Note: This content is provided as general background information and should not be taken as legal advice or financial advice for your particular situation. Make sure to get individual advice on your case from your union, a source on our free help page or an independent financial advisor before taking any action.