Whenever you read about teachers’ pensions – or any pensions come to that – you will find a lot of reference to indexes. It might be that they say your pension is index-linked or that you will receive an indexed amount. This sounds all well and good – but what does it actually mean? Here we try to debunk some of the technicalities of financial language in pensions.
What does Index-linked mean?
Put simply; your pension being index-linked means that it will be protected from the difficulties caused by rises in inflation. For instance, the amount you paid into your pension 30 years ago would have been significantly lower than now. However, you would have lived a similar lifestyle on the amount you were paid. This is because inflation has risen in the last 30 years, and it costs more to live. Therefore, you need the amount you put in your pension 30 years ago to reflect what its value is now.
The good news is that your pension can only increase in value thanks to being indexed linked.
Every April, your pension value will be adjusted using the Consumer Price Index (yes, another index). The CPI is the official measure of inflation, which is set by the Monetary Policy Committee of the Bank of England. The rate is formally announced in October each year. This increase can make a significant difference to your cumulative pension, so you should see this as a bonus.
What does Indexed Amount mean?
The indexed amount is the level of this revaluation, which is calculated per an index. Sounds more complicated than it is. Remember the CPI, well the indexed amounted this percentage added to the 1.6% added by the Teacher Pension Scheme for those in active members. Deferred members can also see an increase using the Pension Increase (Review) order.
Likely, you will never get into this level of nitty-gritty when it comes to working out your benefits. However, it should offer peace of mind that your pension benefits are impacted by a mechanism that keeps them in line with the cost of living.
The content in this article was correct on 4th July 2020. You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on pensions for teachers and non-teachers. Please use the contact form below to arrange an informal chat with an advisor and see how we can help you.