Given the current high levels of inflation, we’d like to draw your attention to some of the detail of how the inflation protection works on your pension and why you may wish to consider the date that you actually decide to take your pension.
What is a deferred member?
You are a deferred member of a pension scheme if you are no longer an active contributing member to the scheme and you have not started to draw your pension or transferred your benefits to another pension arrangement. This article relates to deferred members of the BAE Systems Pension Scheme (“BAESPS”) and Executive Pension Scheme (“EPS”) and the details of these schemes respective sections are set out below:
- BAE Systems Pension Scheme (Levels 125, 167, 187 and 200 Benefits, Aircrew (pre 2003 joiners) Benefits, Level 100+ Benefits, Passport Benefits, SIPS Benefits, Alvis Benefits and 2000 Plan Benefits)(“BAESPS”)
- Executive Pensions Scheme (Main Edition, 2006 Edition)(“EPS”)
How is inflation protection applied to your pension?
The pension from your scheme includes an element of inflation protection both whilst in deferment (i.e. between leaving service and retirement) and in retirement. If you are a BAESPS or EPS member and retire before your schemes’ Normal Retirement Date (NRD), your deferred pension will increase in line with the Consumer Prices Index inflation measure (CPI) up to:
(a) a maximum of 5% a year compound over your period of deferment for pension relating to active service up to 6 April 2009 and
(b) 2.5% a year for active service after 6 April 2009.
So if you were accruing in the scheme over April 2009 then there will be different rates of increase applying to benefits accrued before and after this date.
If you have any Guaranteed Minimum Pension (GMP) entitlement this will increase differently depending on the Scheme rules. If you are a BAESPS member you should refer to your Scheme Booklet via your Scheme page here for exact information. Please note that you will not have any GMP entitlement if you have BAESPS Level 100+ or 2000 Plan Benefits. If you are an EPS member you can request a copy of your Scheme Booklet via Equiniti on 0800 917 9568. Please note you Scheme Booklet will also confirm your scheme’s NRD.
Your pension scheme administrator calculates how much your pension should be increased by in deferment by comparing the actual inflation over the period between when you left service to retirement to a rolling annual cap of 5% for pension relating to active service up to 6 April 2009 and 2.5% a year for active service after 6 April 2009. This annual increase calculation is performed in January each year.
In retirement your pension is generally increased in line with inflation - with a cap applied. The increases and inflation measure will be dependent on which scheme you are a member of. Please refer to your Scheme Booklet for exact information.
Why would the inflation protection be a consideration in determining when I take my benefits?
If you are a deferred member of the BAESPS or EPS who has yet to reach their scheme’s NRD, you left service a number of years ago and have a large proportion of your service in deferment before 6 April 2009, this may impact on your benefits. Actual inflation has been far enough below the rolling 5% annual cap that, when the current high level of inflation feeds through into the annual increase calculation in 2023, there may well be a sizeable uplift to your deferred pension. The table below illustrates this in column A. If you start taking your benefits before the increase calculation next year (i.e. January 2023), you will not benefit from the sizeable increase, resulting in a lower starting pension income than if you waited until the increase calculation has been applied.
Conversely, if you left service relatively recently with a large proportion of your pension earned after April 2009, there’s likely to be only a small change to the amount of your pension. The table below illustrates this in column B.
What Information is available to me that would help me decide when I should take my benefits?
We’ve prepared below an indicative ‘ready-reckoner’ table assuming that September’s published inflation is exactly 10%. Please bear in mind that this is intended to provide indicative guidance rather than financial advice, the actual increase will be affected by the final inflation figure published and the proportion of your pension benefits classed as pre 6 April 2009, post 6 April 2009 and any GMP.
|Number of full years since becoming a deferred member||A||B|
|2023 increase (pre 6 April 2009 benefits)||2023 increase (post 6 April 2009 benefits)|
Note that the position changes each year you pass an anniversary of the date you left service. This is because revaluation considers the number of complete years since leaving.
Where can I get further information and guidance?
The impact for you will depend on your individual circumstances and will be reflected in any illustration of your benefits after January 2023. If you are thinking of retiring imminently you may wish to consider taking financial advice to help you understand the impact of waiting until 2023 before making any decisions which could affect your retirement income. More information on obtaining financial advice can be found in the ‘Independent Financial Advice’ Pension Guide. Details of your pension scheme administrator can be found here.