A Pension Increase Exchange, also known as a PIE, maybe offered to you if you are part of a private sector defined benefit pension scheme and are approaching the scheme retirement age.  

The list of options when it comes to taking your defined benefit pension can be daunting. 

You can’t afford to make the wrong choice because once chosen it is irreversible.  

It’s impossible to decide which retirement option is best for you without a thorough analysis of the implication of each.

How a Pension Increase Exchange works


Every private sector defined benefit pension scheme has what’s called a ‘normal retirement age’. This is the age at which you could take your pension benefits without an early retirement penalty.  

For most schemes, you don’t have to retire at this point and could delay taking your pension. You could also take it earlier than the normal retirement age but will likely see your pension benefits reduced as the benefits need to be paid for longer than expected.  

A few months before your normal retirement age the pension scheme will write to you with your list of options for taking your pension benefits.


The most common options offered will be:


1. A higher pension income and less or no one-off tax free lump sum.  

2. A lower pension income and a higher one-off tax free lump sum.


For some defined benefit schemes you will also be offered a Pension Increase Exchange. 

Essentially the Pension Increase Exchange option will offer you a higher initial pension income but only part of the income will increase with inflation.  

Here is a real life example that I have looked at recently with a client. 


Option 1 – Standard scheme benefits 

  • Annual pension £10,820 per year. 
  • All increasing by inflation each year. 
  • Tax free lump sum £32,461. 

Option 2 – Standard scheme benefits plus Pension Increase Exchange 

  • Total annual pension £12,328 per year. 
  • Of which 
  • £6,107 increases with inflation each year. 
  • £6,222 does not increase with inflation. 
  • Tax free lump sum £32,461.

Should you take a Pension Increase Exchange?

On first glance, looking at the annual pension income in the options above it looks pretty obvious that option two – the Pension Increase Exchange looks better as it provides a higher level of yearly income.  

However, the key words to look for in the Pension Increase Exchange option are does not increase with inflation”.  

Whilst taking the higher income pension income may seem tempting, prices for the items we buy and the services we use tends to go up over time (inflation).  

The average inflation rate for the UK over the last 60 years has been 5.1% per year. Of course, you have to be careful with averages because for some years it was much higher and some years much lower. 

But if we take the average inflation rate for now, let’s see what happens to the yearly pension income in the options above over 30 years. 

  Starting income  Income in year 10  Income in year 20  Income in year 30 
Option 1 – Standard  £10,820  £16,930  £27,841  £45,783 
Option 2 – PIE  £12,328  £15,777  £21,936  £32,063 

So actually, by taking the Pension Increase Exchange option, you will have less pension income over time if inflation was around the average. 

This is not the whole picture though as we have to factor in total income payments over a period of time, because if you were to take option one without the Pension Increase Exchange you are giving up around £2,000 per year initially.  

Using the two scenarios above it would take option one 12 years of income payments before the total income payments received overtook the payments from the Pension Increase Exchange option. 

So it all depends on your life expectancy, rates of future inflation and lifestyle. Taking the Pension Increase Exchange might suit you if you are in poor health and/or you are planning to spend more in the early years of retirement and then reduce your spending as you get older.  

For private sector defined benefit pensions there is another option which is the cash equivalent transfer value.  

If you are not provided with a cash equivalent transfer value with your retirement options paperwork you might want to request one although just be mindful of timescales and costs. 

The transfer option allows you to give up the secure income in retirement in exchange for a personal pension pot (subject to financial advice) that you can access however you like. 

Giving up the security of income with a defined benefit pension won’t be right for most people but there may be circumstances where you might want more flexible access to your pension benefits.  

I have written extensively and produced many videos on the pros and cons of a defined benefit transfer so I would urge you to check this out. 

The key point in all this is that you need to thoroughly access all your options. Don’t just pick the first option that looks good on paper. The decision you make is likely to be life changing one way or the other.  

Pension schemes have a sneaky way of presenting options to you that suit their benefit not yours.    

If you would like your retirement plans stress tested to ensure your pension doesn’t end up paying lots of tax then please schedule a no obligation free 15-minute call 

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.