What about pension increases for DB schemes?

What about pension increases for DB schemes?

When a member retires they want to know how their pension will increase each year as part of their financial planning.

There are certain statutory increases applied to different tranches of pension and this becomes quite complicated for members of defined benefit schemes that were contracted-out. 

With regards to the examples shown in this section, it is important to note that:

• The increases shown are the minimum in law and scheme rules WILL be different, for example, not all schemes moved from 5%LPi to 2.5%LPI; 
• Many schemes still use RPI not CPI, for price inflation because of their rules;
• Sometimes schemes grant discretionary increases.

Contracted-in Schemes

For any tranche, a scheme may give higher increases or the pension tranches may be different periods but a scheme cannot provide anything less than shown in the table.

If part of the pension was purchased by AVC benefits, they are exempt from these statutory increases.

Contracted-out Schemes

Part of the pension may be in respect of the GMP which has to be split out between the GMP earned pre and post April 1988. Any pension in excess of the GMP is known as the excess pension.The table below shows each tranche of pension and the increase to be applied.

For any tranche, a scheme may give higher increases or the pension tranches may be different periods but a scheme cannot provide anything less than shown in the table.

If part of the pension was purchased by AVC benefits, they are exempt from these statutory increases.

Retirement before the GMP Due Date

If a member of a contracted-out scheme retires before the GMP due date (age 60 for women and age 65 for men), all of their pension is treated as excess pension.

When they reach the GMP due date, the pension is then split between the GMP and excess pension and the relevant increases applied.

Bridging Pension

If the member is in receipt of a bridging pension, this will normally cease at SPA or, if the scheme was contracted-out, at the GMP Due Date.

If the member has any GMP, the ongoing pension will be split to reflect the GMP and the relevant increases will be applied going forward.

Females over age 60

For female members of contracted-out schemes, the GMP Due Date is age 60 but very often the scheme normal retirement date and State Pension Age is later.

On retirement the GMP at age 60 is increased by the scheme by 1/7th x 1% for each week late and statutory increases are applied to the post 88 GMP (the change in the Consumer Price Index up to a maximum of 3% pa).

The State will not pay any increases due on the pre 1988 GMP until the member reaches SPA.

Just to recap on the different dates:GMP Due Date is fixed at age 60 for females and age 65 for males.

State Pension Age depends on when the member was born. 

A member can find this date by going to the website: www.gov.uk/calculate-state-pension if under age 55, and www.gov.uk/state-pension-statement if over age 55.