(LPI) is a pricing index used to calculate increases in components of scheme pension payments in the UK. Currently, the statutory requirement for occupational pension schemes is that pensions in payment must be increased by the lower of RPI and 2.5% . Usually the lesser of the annual increase in the ''Retail Prices Index''(or ''Consumer Prices Index'') and 5%, although the percentage limit can vary. From April 2011, the index used for LPI will be switched from RPI to CPI(Consumer Price Index). The announcement makes it clear that: * this statutory requirement will apply to all rights a member has already accrued – not just future service rights * if a pension is already in payment, a member will remain entitled to the increases already granted but future increases on the whole pension may be based on CPI not RPI; and * schemes can provide greater increases if they wish. The rate of revaluation for pensions in deferment will also change in a similar way (again, with revaluation already granted on an RPI basis being protected)

Usage

The

Pensions Act 1995 The Pensions Act 1995c 26 is a piece of United Kingdom legislation to improve the running of pension schemes. Background Following the death of Robert Maxwell Ian Robert Maxwell (born Ján Ludvík Hyman Binyamin Hoch; 10 June 1923 – 5 N ...

required scheme pension payments arising from

excess contribution Excess may refer to: * Angle excess, in spherical trigonometry * Insurance excess, similar to a deductible * Excess, in chemistry, a reagent that is not the limiting reagent * "Excess", a song by Tricky from the album '' Blowback'' * ''Excess'' ( ...

s to go up at the LPI. Excess contributions are defined as contributions that are not

protected rights Protection is any measure taken to guard a thing against damage caused by outside forces. Protection can be provided to physical objects, including organisms, to systems, and to intangible things like civil and political rights. Although t ...

contributions from contracting out of

State Earnings-Related Pension Scheme The State Earnings Related Pension Scheme (SERPS), originally known as the State Earnings Related Pension Supplement, was a UK Government pension arrangement, to which employees and employers contributed between 6 April 1978 and 5 April 2002, when i ...

(SERPS) or the

State second pension The State Second Pension (S2P), or Additional State Pension, was introduced in the UK by the Labour Government on 6 April 2002, to replace the SERPS (State Earnings-Related Pension Scheme). The main aim of this change was to skew existing Additi ...

(S2P) or any Additional voluntary contributions (AVCs). Only contributions made after April 6, 1997 are required to increase at the LPI rate, so these contributions are known as ''post 1997 excess contributions''. The rules were later amended by the

Pensions Act 2004 The Pensions Act 2004 (c 35) is an Act of the Parliament of the United Kingdom to improve the running of pension schemes. Background In the years following the introduction of the Pensions Act 1995, it was widely perceived that it was failing t ...

so that excess contributions made after April 6, 2005 only had to increase at the RPI rate capped at 2.5% instead of 5%. In either case, the scheme can pay increases greater than the statutory minimum. The rules for payment increases only apply to scheme pensions, i.e. pension payments made from a

defined benefit Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and ag ...

s (DB or final salary) scheme. Payments arising from contributions into a

money purchase pension scheme A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. Individual accounts are set up for participants and benefits are based on the amounts credited to these a ...

(also known as a defined contribution pension scheme) are not required to increase. This is because scheme members have the right to use their fund value to purchase an

annuity In investment, an annuity is a series of payments made at equal intervals.Kellison, Stephen G. (1970). ''The Theory of Interest''. Homewood, Illinois: Richard D. Irwin, Inc. p. 45 Examples of annuities are regular deposits to a savings account, m ...

with their own chosen rate of increase, which could be zero if a level pension is chosen. This right is known as the

open market option The Open Market Option (or OMO) was introduced as part of the 1975 United Kingdom Finance Act and allows someone approaching retirement to ‘shop around’ for a number of options to convert their pension pot into an annuity, rather than simply t ...

(OMO). Following A-day, members also have the right to enter into an unsecured pension arrangement.

External links

The Pensions Advisory Service – LPISummary of The Pensions Act 2004 by Scottish Life
Pensions in the United Kingdom