You are often told you have an ‘index linked ‘ pension and, in this short item written for Pathfinder Magazine, we explain what that means.
Armed Forces pensions, once awarded, are adjusted in April each year by the Consumer Price Index (CPI), the UK’s official measure of inflation, set by the Bank of England’s Monetary Policy Committee. The CPI rate used is the CPI headline rate for the September prior to the April adjustment the following year. This rate is formally announced in October each year. It is these annual CPI increases that constitute index-linking – your scheme refers to them as Pension Increases (PIs).
This increase comes into force not on 1 April each year but on the first Monday after the beginning of the new tax year. The first PI is paid on a sliding scale depending upon when in the year (which runs from 1 April – 31 March each year). The earlier you leave in the period 1 April – 31 March the more of the increase you will receive in the following April. Put very simply, those leaving in the first few weeks of April will get the full PI the following April, those leaving in October will receive about half of the PI the following April and those who leave in the last couple of weeks of March will get no increase in the following April. The full increase is paid in subsequent years. This applies whether the pension is to be paid immediately or not. The proportion of the first increase you receive can make a big difference to your cumulative pension income if CPI is high in the year you retire and, whilst most of you cannot do anything about your discharge date, for those of you who can, it is worth remembering that the date you leave matters – we can help give you the facts to let you to decide what that date is.