beeRightMovieBee

Register for updates

Sign up to get the latest BeeLines sent direct to your inbox. You can unsubscribe later if you wish.

BeeHive  >  BeeLines  >  Pension increases after April 2005

Pension increases after April 2005

This oneís one of those heavy BeeLines Iím afraid, but Iíll try to liven it up a bit. What I want to do with it is to get you up to speed with the way the Pensions Act 2004 will change the current requirements for pensions to be increased while in payment (boring, I know, but necessary). This part of the Pensions Act comes into force pretty soon on 6th April 2005, so itís something youíll need to know inside out if you want to win friends and influence people in the new world of pensions.

In summary, the annual level of pension increases that final-salary schemes are currently required to provide when people retire is coming down a bit, whereas the current requirement that people with money-purchase pensions buy at least some level of pension increase when they set up an annuity is going out of the window. So after 6th April this year final-salary schemes will still have to provide some level of increase to new pensions that come into payment. But money-purchase schemes (both corporate and individual) will be able to provide pensions that donít increase at all if thatís what people want. Evidently itís all to do with reducing the cost burden on employers with final-salary commitments and, on the other hand, giving more choice to people in money-purchase schemes. How it fits with this idea that we are going to have a single, simple tax regime after A-Day I donít know, but thatís probably just me being picky again. What it does mean, though, is that people retiring from money-purchase schemes in the future will need to have some help choosing suitable annuities and the Pensions Act is therefore bringing in a new requirement that such people must be given more information at the point of retirement.

More information on that later, but first the nitty-gritty facts. The best way to do this is probably to set out all the current indexation requirements for different types of pensions and then to do the same for the new requirements that come into force on 6th April 2005.

The current indexation requirements (applying to all pensions coming into payment on or before 5th April 2005)


Final-Salary Occupational Pension Schemes


Pre 6th April 1997 benefits - no requirement to increase this part of the pension.

Post 5th April 1997 benefits - this part of the pension must increase annually by at least the lesser of RPI and 5%.

Pre 6th April 1988 Guaranteed Minimum Pensions - no requirement to increase this part of the pension (although the State provides RPI increases).

Post 5th April 1988 Guaranteed Minimum Pensions - this part of the pension must increase annually by at least the lesser of RPI and 3%.

Money-Purchase Occupational Pension Schemes

Pre 6th April 1997 benefits - no requirement to increase this part of the pension (other than protected rights benefits).

Pre 6th April 1997 protected rights benefits - this part of the pension must increase annually by at least the lesser of RPI and 3%.

Post 5th April 1997 benefits - this part of the pension must increase annually by at least the lesser of RPI and 5%.

Personal Pensions

Non-protected rights benefits - no requirement to increase any pension bought with these benefits (whether pre or post 1997).

Pre 6th April 1997 protected rights benefits - this part of the pension must increase annually by at least the lesser of RPI and 3%.

Post 5th April 1997 protected rights benefits - this part of the pension must increase annually by at least the lesser of RPI and 5%.

(Keep awake at the back!)


New Indexation Requirements (applying to all pensions coming into payment on or after 6th April 2005)


Final-Salary Occupational Pension Schemes


Pre 6th April 1997 benefits - no requirement to increase this part of the pension.

Benefits accrued post 5th April 1997 but pre 6th April 2005 - this part of the pension must increase annually by at least the lesser of RPI and 5%.

Benefits accrued post 5th April 2005 - this part of the pension must increase annually by at least the lesser of RPI and 2.5%.

Pre 6th April 1988 Guaranteed Minimum Pensions - no requirement to increase this part of the pension (although the State provides increases by RPI).

Post 5th April 1988 Guaranteed Minimum Pensions - this part of the pension must increase annually by at least the lesser of RPI and 3%.

Money-Purchase Occupational Pension Schemes

All benefits (including protected rights) - no requirement to increase this part of the pension.

Personal Pensions

All benefits (including protected rights) - no requirement to increase this part of the pension.


So you can see that, while itís stretching things a bit to say that the new regime is simpler than the old one, no one can argue that itís not different at least. One thing, though, the complete removal of the indexation requirements for money-purchase, personal pension and all protected rights benefits is not retrospective. So, when a pension comes, or has come, into payment on or before 5th April 2005, the indexation requirements, which apply or applied when payments started, will continue to apply for all the time the pension is being paid in the future.

Itís worth pointing out, I think, that these changes will need to be reflected in company pension scheme rules asap if we donít want the whole thing to turn into a dogís dinner. There are three simple rules of thumb that pension scheme trustees and administrators need to get happy with:

  1. The legislation only provides minimum indexation requirements.
  2. Where the indexation requirements are higher than those provided for in the scheme rules, the legislation overrides the rules.
  3. Where the provisions for indexation within the scheme rules are higher than those required by the legislation, however, it is the scheme rules that must be followed.

Itís not hard to see how some of this could creep up on trustees unawares and catch them out. The most obvious pitfall, I suppose, would be for money-purchase schemes whose rules currently spell out the existing requirements when describing the form of benefits the scheme provides. If no changes are made to the scheme rules by 6th April this year, then people retiring from such schemes would find they will still have to buy increases to their pensions even though the Government guys donít insist on it any more.

This leads me, I guess, to these new information requirements that are coming in on 6th April 2005 too. Those of you still awake (or even reading) may remember I mentioned them a lifetime ago when I started writing this BeeLine. Because money-purchase schemes will no longer be pushing people into buying pensions that increase when they retire, the Pensions Act now requires that schemes must provide information about the different types of annuities on offer in the marketplace. Crucially, they will also be required to advise people retiring to seek professional advice as to which type of annuity is the most suitable for them. Thatís good news for advisers I think. Itís the current intention that the information regarding the characteristics of level and escalating annuities will be set out in a Guidance Note prepared either by the Pensions Regulator, or the Financial Services Authority. Either way it promises to be a cracking read.

Steve Bee
16 February 2005


This document is based on Scottish Life's current understanding of the Pensions Act 2004. This may be affected by future changes in legislation and the individual circumstances of the investor. Independent advice must be sought regarding the effect on a specific scheme.