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  • FIRST POST
    • peterr_ibg
    • By peterr_ibg 17th Jun 17, 9:26 AM
    • 22Posts
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    peterr_ibg
    Leaving Final Salary Scheme - Can you challenge CETV?
    • #1
    • 17th Jun 17, 9:26 AM
    Leaving Final Salary Scheme - Can you challenge CETV? 17th Jun 17 at 9:26 AM
    I am trying to retire early ( 55) with a final salary pension scheme that has a normal retirement age of 65

    I have some health issues that mean my life expectancy is much shorter than the average, but am not expected to die in the next couple of years. Hence the reason for wanting to retire as early as possible. I am married with a non earning spouse and children

    I obtained a CETV to see if a flexible drawdown may work better for me than taking a reduced final salary pension at 55 and was surprised at the seemingly poor value I've been offered.

    The statement says I'm giving up a potential final salary of £27500 with max 2.5% growth pa for inflation in return for approx £440,000 . This calculates to me to equate to about 16x earnings which in todays climate seems not good value.

    On top of this they state that the scheme is underfunded ( Its a private company I work for) and therefore they have reduced my CETV by 21% to just over £350,000 or short of 13 x . So a double whammy of not great news for me

    To make £350,000 work for me to enable me to retire at 55 is something I will be working on , however, I wondered if the figures can be challenged at all. I understand the reasoning behind the reduction due to underfunding, but the initial CETV itself does not look to be good value. Even if not challenged can I request to see the calculations they used , or would this be asking them to over simplify a complex set of calculations?

    Thank in advance for any advice or input
Page 1
    • xylophone
    • By xylophone 17th Jun 17, 9:57 AM
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    xylophone
    • #2
    • 17th Jun 17, 9:57 AM
    • #2
    • 17th Jun 17, 9:57 AM
    http://www.pensionsandannuities.co.uk/The_transfer_value_calculation.htm

    Your DB pension benefits protect your wife and dependent children?

    If you retire at 55 on an actuarially reduced pension, would your wife return to work?

    Have you and your wife obtained new state pension statements?

    https://www.gov.uk/check-state-pension
    • dunstonh
    • By dunstonh 17th Jun 17, 10:05 AM
    • 89,490 Posts
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    dunstonh
    • #3
    • 17th Jun 17, 10:05 AM
    • #3
    • 17th Jun 17, 10:05 AM
    however, I wondered if the figures can be challenged at all.
    Challenge is not really a word I would use. TO challenge it, you would need to know that something is wrong. You can ask them to verify the figures if you feel they are incorrect. Tone being the main difference in the wording I suppose.

    Even if not challenged can I request to see the calculations they used , or would this be asking them to over simplify a complex set of calculations?
    Not sure that the information would do you any good. It is known as a best estimate calculation for good reason. Would you have the knowledge to understand the calculation?

    There is an alternative method that can be used that can result in a higher CETV but this tends to be used when the employer is looking to encourage people to transfer out. it is unlikely to be used here given the figures you mention but is frequently used in those with higher transfer values.

    Gilt yields have been climbing and that means that part of the assumptions will lower transfer values. We are not at peak transfer values any more (Aug 16 with a blip earlier this year).

    The main hit is your reduction for underfunding. 21% is a significant amount.

    Ask them to run a check again stating that you feel they are lower than anticipated but be prepared for them to verify as correct as the figures are within the range expected.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • peterr_ibg
    • By peterr_ibg 17th Jun 17, 10:20 AM
    • 22 Posts
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    peterr_ibg
    • #4
    • 17th Jun 17, 10:20 AM
    • #4
    • 17th Jun 17, 10:20 AM
    http://www.pensionsandannuities.co.uk/The_transfer_value_calculation.htm

    Your DB pension benefits protect your wife and dependent children?

    If you retire at 55 on an actuarially reduced pension, would your wife return to work?

    Have you and your wife obtained new state pension statements?

    https://www.gov.uk/check-state-pension
    Originally posted by xylophone

    If I retired at 55 my DB pension would pay me about £9,000 per year plus a £65,000 lump sum. If I then died my wife would receive a pension of just over £6,000 per year, but that pension would end on her death.

    My wife has not worked for 20 years and would not return if I were to retire

    Yes, we have got the new state pension quotes. I have not included these in any of my assumptions
    • atush
    • By atush 17th Jun 17, 10:23 AM
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    atush
    • #5
    • 17th Jun 17, 10:23 AM
    • #5
    • 17th Jun 17, 10:23 AM
    Have you explored ill health retiral? Which generally means no reduction in your pension?
    • errolt1
    • By errolt1 17th Jun 17, 10:35 AM
    • 11 Posts
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    errolt1
    • #6
    • 17th Jun 17, 10:35 AM
    • #6
    • 17th Jun 17, 10:35 AM
    is the final salary of £27,500 at age of 55 , 60 or 65 ? I had a forecast salary at 55 of £16,667 and one at 60 for £23k and one at 65 for £25k.
    I am 53 at the moment and my CETV is circa £300k more than the one you have been quoted.
    No scheme does not have many members , maybe 8 or 9k and only a small number are actually retired.
    i think it was to do with getting me to cash in and take me of the books .
    • peterr_ibg
    • By peterr_ibg 17th Jun 17, 10:47 AM
    • 22 Posts
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    peterr_ibg
    • #7
    • 17th Jun 17, 10:47 AM
    • #7
    • 17th Jun 17, 10:47 AM
    Have you explored ill health retiral? Which generally means no reduction in your pension?
    Originally posted by atush

    I have explored this and the pension rules state there is no 'enhancement' for retiring on ill health grounds. This is my frustration, Im trying to leave work due to my health , but there is always the problem that I am the only source of income in the household and although we can tighten our belts an income of £9,000 per year won't sustain us ( assuming I just take the numbers as offered for retiring at 55)
    • xylophone
    • By xylophone 17th Jun 17, 10:50 AM
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    xylophone
    • #8
    • 17th Jun 17, 10:50 AM
    • #8
    • 17th Jun 17, 10:50 AM
    Does your wife have a deferred pension with a former employer or a personal pension?

    If not, as she appears to have no relevant earnings, had she thought of contributing £2880 net per tax year to a personal pension which would result in the addition of £720 tax relief?
    • peterr_ibg
    • By peterr_ibg 17th Jun 17, 10:51 AM
    • 22 Posts
    • 3 Thanks
    peterr_ibg
    • #9
    • 17th Jun 17, 10:51 AM
    • #9
    • 17th Jun 17, 10:51 AM
    is the final salary of £27,500 at age of 55 , 60 or 65 ? I had a forecast salary at 55 of £16,667 and one at 60 for £23k and one at 65 for £25k.
    I am 53 at the moment and my CETV is circa £300k more than the one you have been quoted.
    No scheme does not have many members , maybe 8 or 9k and only a small number are actually retired.
    i think it was to do with getting me to cash in and take me of the books .
    Originally posted by errolt1
    £21,500 is the figure at todays value at 65 - the quote at 55 was £12,500 . The difference between the two numbers ( £21,500 vs £27,500) is the estimated growth ( CPI) between now and 2030. Our scheme is also small and there is a plan to get the fund out of deficit with input from the company, but that doesn't help me now
    • xylophone
    • By xylophone 17th Jun 17, 10:53 AM
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    xylophone
    I am the only source of income in the household and although we can tighten our belts an income of £9,000 per year won't sustain us
    You mention that your wife hasn't worked outside the home for twenty years but is there any reason why she couldn't?

    Could you work part time if you took the reduced DB pension?
    • peterr_ibg
    • By peterr_ibg 17th Jun 17, 10:59 AM
    • 22 Posts
    • 3 Thanks
    peterr_ibg
    Does your wife have a deferred pension with a former employer or a personal pension?

    If not, as she appears to have no relevant earnings, had she thought of contributing £2880 net per tax year to a personal pension which would result in the addition of £720 tax relief?
    Originally posted by xylophone

    No, she has no deferred or personal pension. her only income is a non means tested govt benefit that is non taxable. I guess that the scenario you give above would be something we could discuss with an IFA about the whole CETV position?

    Because of both of our health situations neither of us would be able to work
    Last edited by peterr_ibg; 17-06-2017 at 11:00 AM. Reason: addition
    • bigadaj
    • By bigadaj 17th Jun 17, 11:14 AM
    • 9,961 Posts
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    bigadaj
    £21,500 is the figure at todays value at 65 - the quote at 55 was £12,500 . The difference between the two numbers ( £21,500 vs £27,500) is the estimated growth ( CPI) between now and 2030. Our scheme is also small and there is a plan to get the fund out of deficit with input from the company, but that doesn't help me now
    Originally posted by peterr_ibg
    But the cetv value is current, so you should be comparing with the £21500 figure, you are comparing apples with oranges.
    • Thrugelmir
    • By Thrugelmir 17th Jun 17, 12:14 PM
    • 55,188 Posts
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    Thrugelmir
    but the initial CETV itself does not look to be good value.
    Originally posted by peterr_ibg
    Scheme members have to be treated on an equitable basis. The Pension Trustees have a responsibility to ensure that this is the case. A pie can only be cut so many ways.
    “ “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Marks Templeton
    • davieg11
    • By davieg11 17th Jun 17, 12:32 PM
    • 241 Posts
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    davieg11
    £21,500 is the figure at todays value at 65 - the quote at 55 was £12,500 . The difference between the two numbers ( £21,500 vs £27,500) is the estimated growth ( CPI) between now and 2030. Our scheme is also small and there is a plan to get the fund out of deficit with input from the company, but that doesn't help me now
    Originally posted by peterr_ibg
    If you are 55 just now and your quote is £12,500 then £440000 is a multiple of X35. You won't get much better than that.
    • peterr_ibg
    • By peterr_ibg 17th Jun 17, 1:01 PM
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    peterr_ibg
    If you are 55 just now and your quote is £12,500 then £440000 is a multiple of X35. You won't get much better than that.
    Originally posted by davieg11
    Sorry, but that's not how CETV is calculated . Xylophone offered this link that explains

    http://www.pensionsandannuities.co.uk/The_transfer_value_calculation.htm
    • Linton
    • By Linton 17th Jun 17, 1:34 PM
    • 8,202 Posts
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    Linton
    Sorry, but that's not how CETV is calculated . Xylophone offered this link that explains

    http://www.pensionsandannuities.co.uk/The_transfer_value_calculation.htm
    Originally posted by peterr_ibg
    True but according to that reference the £440K/£350K should be increased by the discount rate over the next 10 years to get a meaningful "conversion rate", the inverse of the X earnings figure. One way or another you either compare money now with pension now or money at 65 with pension at 65, Your 16X figure comes from comparing pension at 65 with money at 55.
    Last edited by Linton; 17-06-2017 at 1:38 PM.
    • agarnett
    • By agarnett 17th Jun 17, 2:12 PM
    • 1,282 Posts
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    agarnett
    The administrators, sponsoring employer, Trustees, and appointed actuaries (in that order), probably won't like it, and you may even be denied it for no good reason, and then told there is a ridiculous charge per hour for "more information", but you can ask for a full breakdown line by line of the CETV calculation, and if your maths is up for it, you may be able to rework it using their methodology but with your corrected data, and it may result in a revised calculation in your favour. Or it may work the other way too!

    Contrary perhaps to popular opinion because punters quite reasonably suppose that the actuaries responsible are flawless experts, these calculations are only as good as the people that put data in one end, program the process in the middle, and interpret correctly what comes out when they turn the handle.

    Mine was approximately 10 lines of calculation each containing around 10 steps - the sort of thing you can only really tackle yourself if you are pretty fluent with how to use MS Excel functions.
    • xylophone
    • By xylophone 17th Jun 17, 4:20 PM
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    xylophone
    I guess that the scenario you give above would be something we could discuss with an IFA about the whole CETV position?
    It's a fairly simple procedure.

    http://forums.moneysavingexpert.com/showthread.php?t=5580163
    • kidmugsy
    • By kidmugsy 17th Jun 17, 4:40 PM
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    kidmugsy
    If I retired at 55 my DB pension would pay me about £9,000 per year plus a £65,000 lump sum.
    Originally posted by peterr_ibg
    Or you could take a CETV of about £350k. Assume you take 25% tax-free lump sum i.e. £88k: that's £23k bigger than the £65k alternative. You'd be left with a tax-exposed pension pot of £262k, plus the £23k tax-free surplus. So your ratio is approx

    (£262 + £23)/£9k p.a. = about 32x. That's far better than the 13x you were complaining about.

    You would, presumably, aim to top up your wife's entitlement to State Pension, and contribute to a private pension for her. With your poor life expectancy there might be no point contributing more to a State Pension for yourself, but it might be sensible to contribute to a private pension that you could drawdown later on, or would transfer to your widow on your death. (If you died before age 75 she could draw income from your remaining pensions tax-free.)

    The big question is how much annual post-tax income you think the pair of you need to live on. Did you tell us that?
    • kidmugsy
    • By kidmugsy 17th Jun 17, 4:45 PM
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    kidmugsy
    One other thought: if your health is lousy, you might consider investing part of your CETV taxable capital into an ill-health annuity. Your IFA could presumably get quotations for you.
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