How Much Does Your Private Pension Increase Each Year

Learn how private pensions increase annually in the UK. Understand the impact of inflation, investment performance, and scheme rules on pension growth.

How Much Does Your Private Pension Increase Each Year?

If you have a private pension, you may be wondering how much it increases each year. Unlike the State Pension, which usually rises with inflation or the triple lock, private pensions can vary in growth depending on the type of scheme, investment performance, and choices you make.

This article explains how private pensions can increase each year, the factors that affect growth, and what you can do to help your pension keep up with the cost of living.

What is a private pension?

A private pension is a pension that is not provided by the State. It includes:

  • Defined contribution pensions such as personal pensions and self invested personal pensions (SIPPs)

  • Defined benefit pensions, often known as final salary or career average schemes, usually provided by employers

  • Workplace pensions arranged through your employer, which may be either defined contribution or defined benefit

How your pension increases each year depends on the type of pension you hold.

Defined contribution pensions

With a defined contribution pension, the value of your pension depends on:

  • How much you and your employer contribute

  • Investment performance

  • Fees charged by the provider

Does it increase automatically?

There is no fixed increase each year. The value of your pension pot can go up or down depending on how your investments perform. Over the long term, pension investments aim to grow in line with or above inflation.

Historical average annual returns might be:

  • 4 to 7 percent per year for balanced or growth-focused investment strategies

  • Less for more cautious or low-risk investment funds

However, returns are not guaranteed, and some years may see little or no growth.

Can I protect my pension from inflation?

Some pension providers offer inflation-linked funds, which aim to grow in line with the Consumer Prices Index (CPI) or Retail Prices Index (RPI). You can also regularly review your investment choices to ensure they are appropriate for your retirement goals.

Defined benefit pensions

With a defined benefit pension, your retirement income is based on your salary and years of service. These pensions typically increase each year in line with inflation or a fixed rate, both before and after retirement.

How much does it increase?

Your pension increase will depend on the scheme rules, but many follow the following pattern:

  • Increases are linked to Consumer Prices Index (CPI) or Retail Prices Index (RPI)

  • Some schemes cap annual increases, for example at 5 percent

  • Public sector pensions usually increase each April in line with the CPI figure from the previous September

For example, if the CPI is 6.7 percent, your defined benefit pension may increase by 6.7 percent that year, unless capped.

These annual increases are called pension uprating or index linking, and they help maintain the value of your income over time.

What if I buy an annuity?

If you use your pension pot to buy an annuity, you can choose whether or not your income increases each year. Common options include:

  • Level annuity – your income stays the same each year

  • Inflation-linked annuity – your income increases each year in line with inflation

  • Fixed increase annuity – your income rises by a fixed amount each year, such as 3 percent

Choosing an annuity that increases each year will start with a lower initial income but will protect your purchasing power over time.

How do pension withdrawals affect growth?

If you leave your pension invested and use drawdown to take income, your remaining pot can continue to grow based on investment returns. However, withdrawing too much too quickly may reduce your pot faster than it grows.

To ensure your pension keeps pace with inflation:

  • Keep withdrawals within a sustainable level, usually around 3 to 4 percent annually

  • Review your investments regularly

  • Adjust your income in years when markets perform poorly

Final thoughts

How much your private pension increases each year depends on your pension type and how it is managed. Defined benefit pensions often have guaranteed increases, while defined contribution pensions rely on investment performance and do not have fixed annual growth.

By understanding how your pension works and taking steps to manage it wisely, you can help protect its value over time and make sure it continues to meet your needs throughout retirement.