Skip to content
English
Customer portal
  • There are no suggestions because the search field is empty.

Inflation rules - Cap and Collar Inflation Adjustment

Summary

  • Limits on yearly increases: The Cap and Collar Inflation Adjustment puts an upper limit (cap) and a lower limit (collar) on how much a client's spending changes with inflation each year.

  • Steadier income: Spending still follows inflation, but more slowly in high-inflation years, and it can be stopped from falling when prices fall.

  • Defaults: In Timeline Planning the cap starts at 5% and the collar at 0%.

  • Adjustable: You can set the cap from 0% to 10% and the collar from -10% to 5% to suit the client.

Description

The Cap and Collar Inflation Adjustment is one of the inflation rules that decide how a client's planned spending changes from one year to the next. Instead of rising strictly in line with inflation, spending rises with last year's inflation but:

  • never by more than the cap, the maximum yearly increase;

  • never by less than the collar, the minimum yearly change. With a collar of 0%, spending doesn't fall in years when prices fall.

The effect is that income grows more slowly than inflation in high-inflation periods, which eases the pressure on the portfolio, and is protected from cuts when prices fall.

To use it, open the client's financial plan, click "Settings", and under "Plan settings" in the left menu click "Inflation & Withdrawal rules". Under "Inflation", select "Cap and Collar Inflation Adjustment", then set "Set an annual upper limit (cap) of" and "Set an annual lower limit (collar) of". Click "Save changes".

Like all inflation rules, Cap and Collar works on last year's inflation. In a year when a spending phase or one-off item starts, or the year after one ends, Timeline rebuilds spending from the planned amounts.

Example

A retiree starts with spending of £50,000 a year, with the default cap of 5% and collar of 0%.

  • Year 1, inflation 7%: without a cap, spending would rise to £53,500 (£50,000 × 1.07). With the 5% cap, it rises to £52,500 (£50,000 × 1.05).

  • Year 2, inflation -2%: without a collar, spending would fall to £51,450 (£52,500 × 0.98). With the 0% collar, it stays at £52,500.

Conclusion

The Cap and Collar rule smooths a client's spending: no sudden jumps in high-inflation years and no cuts when prices fall. Setting the cap and collar lets you show clients how a more measured approach to inflation-linked increases affects how long their money lasts.

For the default rule, read Inflation rules - Inflation-adjusted.