Advice on Pension Quotation Please

acc

Please would you pensions experts give me some advice on the early retirement pension quotation I have just received on a deferred pension from the Nortel pension plan, which is going into the Pension Protection Fund (PPF).

The pension is payable from age 65, but I may take retirement benefits from age 62 with no reduction for early retirement.
- Are there any reasons for not taking retirement benefits at 62? I would guess that any annual increases in the three years between 62 and 65 would be minimal, as they are presumably only for the CPI.

I asked for a pension quotation for retirement at age 62, but under PPF rules, the quotation is for immediate retirement.
- Does anyone have a feel for the annual reduction percentage? I believe the old Nortel pension plan reduction was 3% for each year, but it may have changed because of the PPF.

The pension quoted now is only 93.5% of the pension at April 2008.
- Does that seem a reasonable reduction for the pension now being under the PPF and considering that 3 years have passed?

The gross annual pension is 5% of the pension value.
- Is this a reasonable return?

The quotation offers an option of taking 20% of the pension value as a lump sum, but this reduces the annual pension by 25%.
- Is this not unfair and just to stop people from taking the lump sum option?
- Is there any advantage in that the lump sum is not taxed, but the equivalent pension would be taxed?

The pension was built up before April 1997.
- Is it right that once the pension is started, the annual pension is fixed, with no increases for the CPI?

Thanks for reading, and for your advice on the above.

atush

What age are you now? when will you be 62?

acc

atush wrote: »

What age are you now? when will you be 62?

I'm not 62 for a few years, but taking retirement benefits before 62 is just one of the factors that I am considering.

Zelazny

acc wrote: »

Please would you pensions experts give me some advice on the early retirement pension quotation I have just received on a deferred pension from the Nortel pension plan, which is going into the Pension Protection Fund (PPF).

The pension is payable from age 65, but I may take retirement benefits from age 62 with no reduction for early retirement.
- Are there any reasons for not taking retirement benefits at 62? I would guess that any annual increases in the three years between 62 and 65 would be minimal, as they are presumably only for the CPI.

I'd clarify this, if I were you. The PPF do not apply any revaluation to benefits past the Normal Pension Age, which they define as the earliest date that you can take benefits without actuarial reduction. If you can take the whole lot at 62, then it wouldn't receive increases beyond that point (not even in line with CPI). (I may be out of date on this, but that was certainly the case a year ago, anyway - I'd call the administrators and check)

acc wrote: »

I asked for a pension quotation for retirement at age 62, but under PPF rules, the quotation is for immediate retirement.
- Does anyone have a feel for the annual reduction percentage? I believe the old Nortel pension plan reduction was 3% for each year, but it may have changed because of the PPF.

The PPF revaluation is all based on the change in retail prices (CPI now), and as such they can't tell you what the benefits will be at some point in the future. The reduction can be viewed on the PPF website: http://www.pensionprotectionfund.org.uk/TechnicalGuidance/Pages/EarlyRetirementFactors.aspx

acc wrote: »

The pension quoted now is only 93.5% of the pension at April 2008.
- Does that seem a reasonable reduction for the pension now being under the PPF and considering that 3 years have passed?

The gross annual pension is 5% of the pension value.
- Is this a reasonable return?

The fact that you're under your normal pension age and the scheme has gone to the PPF means that the benefits are subject to a 10% reduction. Thus, 93.5% sounds reasonable. The "value" listed is for reference to the Government's Lifetime Allowance. It's a DB scheme (or it wouldn't be involved with the PPF) so there is no inherent "value", the amount they quoted is literally 20 x pension, so it will always be exactly 5%.

acc wrote: »

The quotation offers an option of taking 20% of the pension value as a lump sum, but this reduces the annual pension by 25%.
- Is this not unfair and just to stop people from taking the lump sum option?
- Is there any advantage in that the lump sum is not taxed, but the equivalent pension would be taxed?

The commutation factors are not going to be exactly 20. As I mentioned, the value given is a made up figure, required by the government. The actual commutation factors used can be found on the website at http://www.pensionprotectionfund.org.uk/TechnicalGuidance/Pages/CommutationFactors.aspx The commutation factors at that link will take into account things like life expectancy, whereas the "value" does not. There is clearly some advantage in the fact that the lump sum is not taxed, but whether that warrants giving up some pension for it is something that has to be determined by you. I will say that in my experience, 90%+ of people take the lump sum, but that doesn't mean that it's the financially sensible thing to do.

acc wrote: »

The pension was built up before April 1997.
- Is it right that once the pension is started, the annual pension is fixed, with no increases for the CPI?

The PPF is there to provide benefits for people in schemes that cannot afford to pay all of the pensions that they owe, and as such they would otherwise receive less. One of the tests of whether or not a scheme is allowed into the PPF is whether or not the scheme can afford to provide benefits at least equivalent to what the PPF would pay, and only if the scheme cannot does it go into the PPF. As such, the PPF pays only the minimum statutory increase on pensions in payment (which is nothing for pre 97 benefits).

Zelazny

acc wrote: »

I'm not 62 for a few years, but taking retirement benefits before 62 is just one of the factors that I am considering.

The PPF early retirement factors are very generous, compared to a lot of other schemes. Early retirement can often work out quite well (in fact, some people may be better off under the PPF than they would have been without), so it's worth considering.

acc

Zelazny wrote: »

The PPF early retirement factors are very generous, compared to a lot of other schemes. Early retirement can often work out quite well (in fact, some people may be better off under the PPF than they would have been without), so it's worth considering.

Zelazny - Many thanks for your expert and comprehensive guidance on the points I asked about.

Your explanations are spot on, although I was told that the pension value would increase between age 62 until 65 until actually taken. Either way, this does not matter to me, as following your advice I intend to take the pension before age 62. The PPF early retirement factors page which you referenced shows reductions for NPA 62 of 61 2.3%, 60 4.4%, 59 6.5%, 58 8.3% and 57 10.1%, better than Nortel's 3% per year.

I will probably take the lump sum option, despite the 20% lump sum resulting in an unfair reduction of 25% for the annual pension.

Thanks again for your very helpful advice.