Five things your clients should know about pension increase offers

Pension increase exchange offers, where members are offered more money now in exchange for fewer increases in pension payouts later, can be a tricky business. KPMG gives its top five points to consider.

Mike Smedley, pensions partner at KPMG, has put together a list of things to consider if a client receives a letter from their employer offering them an exchange.

1) The differing long-term inflation projections for RPI and CPI - currently about 3% for RPI and 2% for CPI.

2) The possible impact on state benefits

3) The effect on the client's tax position, both income tax and the value of pension benefits tested against the lifetime allowance

4) The chance of living longer than expected

5) The impact on death benefits for dependants. Some offers will result in spouses receiving a non-increasing pension while others will leave these benefits unchanged

Smedley said the golden rule is that a member expecting to live another 20 years after retirement whose pension is currently indexed by 3% per year, a 30% increase in their cash now would make the swap fair. 

"It is crucial each individual is sure that they understand exactly what they have now and what their options are so they can make the right choice for their own circumstances," he said.

Pensions minister Steve Webb has promised to investigate these and similar offers from pension schemes.