Final Salary statement

gospete

I am approaching 62 and have just received an 'illustration' of the pension that I now qualify for. Knowing next to nothing about pensions! I would be interested to know from other MoneySavers if these figures are typical or at least in the right ball park.

Background.
Member of a Final Salary scheme for 13 years - from 1983 to 1996 (so left the scheme approx 15 years ago).
Salary on leaving £34,000 pa

Illustration (pension payable from next month, when I'm 62).
Full pension 12,000 pa
or
Reduced pension £9,500 pa with a lump sum of £63,000

So... reducing my pension by just 2.5k gives me a lump sum of £63k. Does this seem right? I'd be interested to know how these things are worked out.
Any comments gratefully received.

jamesd

A 25:1 commutation rate (lump sum:income sacrificed) is an unusually good deal for a lump sum. Is there really no lump sum at all with the full £12,000 pension?

If your health is normal it's worth considering things like how the pension increases with inflation and how long you may live. Half 65 year old men are currently expected to live to about 90 years of age and older, slightly more for women. Assuming reasonably normal inflation increases to the pension it means that you'd be worse off after about 15-20 years if you took the lump sum.

A current final salary pension would normally pay out 1/60th of 1/80th of the income for each year worked, increased with some inflation allowance. £34,000 in 1996 is about £51,340 after inflation so yours appears to be paying out about 1/55th. Given the approximations in the inflation calculation it's probably a 1/60th scheme. That's at the more generous end of things.

A common poor choice is to take a lump sum and use that to clear a mortgage. A 25:1 commutation rate is about 4% tax free before allowing for the inflation increases which take it to perhaps 7%. Few people have a mortgage at 7% so paying off the mortgage usually makes people worse off long term. A more efficient alternative would be something like extending the mortgage term so that the income more than covers the monthly repayments with some extra money left over, that increases each year as the pension increases with inflation. You haven't said you're planing to do this, I'm just mentioning it because it's quite common.

gospete

Thank you jamesd.
Very useful information.

There was no lump sum option with the 'full' pension, although there was an option to specify a different (lower) lump sum with the pension adjusted accordingly.

I must admit that I was very pleased with the figures that I received for 13 years service, bearing in mind some of the adverse publicity surrounding pensions.
Apart from the commutation figure, I'm assuming that everything else stacks up or is it common for Pension Administrators to make mistakes when preparing illustrations?

jamesd

There can be mistakes in illustrations but it's not common. You seem to have a good deal, whichever option you choose.

jackyann

I think that in calculating your options, you need to know if the pension is index-linked. That makes a big difference.

I know it's unscientific, but when I was doing my calculations, I looked at the average age of death for women in my locality, factored in the ages my close relatives died, and gave myself a nominal "death date!

gospete

I have just been looking at my various copies of pension paperwork, including my 'Statement of Preserved Benefits' on leaving the scheme in August 1996.
I am puzzled by the following:
My annual benefit statements specify 'Pensionable Pay' which seemed to accurately reflect my annual salary at the time, approx £34,000 (statement date 01/01/95) and £36,500 (statement date 01/01/96) - the only statements I've kept.
However, my 'Statement of Preserved Benefits' states 'Final Pensionable Pay' at a lower figure of approx £30,000.
Could the latter FPP be a pro-rata figure for the final year ? or do PP and FPP mean different things ?

jamesd

I don't know the answer to this, the pension scheme should be able to explain

Andy_L

gospete wrote: »

I have just been looking at my various copies of pension paperwork, including my 'Statement of Preserved Benefits' on leaving the scheme in August 1996.
I am puzzled by the following:
My annual benefit statements specify 'Pensionable Pay' which seemed to accurately reflect my annual salary at the time, approx £34,000 (statement date 01/01/95) and £36,500 (statement date 01/01/96) - the only statements I've kept.
However, my 'Statement of Preserved Benefits' states 'Final Pensionable Pay' at a lower figure of approx £30,000.
Could the latter FPP be a pro-rata figure for the final year ? or do PP and FPP mean different things ?

Pensionable pay is the money you've earned in that year that is pensionable ie it could include, as well as salary, overtime & certain allowances.
The Final pensionable pay could be, eg, the average of "pensionable pay" over your last 3 years of employment, probably making it lower than "pensionable pay" in your last year of service.
As Jamesd said you'd have to check the scheme rules/administrators to see the definitions

gospete

Thanks for these useful comments.

I am due to start receiving my pension next month.
Can the current volatility in the stockmarket or euro etc have a last minute impact on my pension - or are things protected to a certain extent?
One more thing to worry about!

JoeCrystal

Nope. That is a nice thing about your scheme. It is the company that take all the risk of investments. So, no worries on that element!

Cheers

Joe

gospete

Thanks Joe.

Just to clarify. I think I understand that once I receive the pension it should be safe. What I was worried about is can market volatility during the months or days leading up to the start of the pension affect the sum ?

Peter.