Frozen final salary pension.

let_it_be

I have a final salary pension which was frozen when I left the company in approx 1990. In 2012 I got a quote on the pension and it stated for testing against your lifetime allowance the value of your full pension at the date of retirement shown on this quotation, if the tax-free cash sum and residual pension options are taken is £187.723. In August last year (16 months later) I requested another quote and this figure had reduced to £164.453. As Im retiring in April so I got a final quote and it has gone down again to £159.763. From August to January it has reduced by nearly a thousand a month and from 2012 its down, just short of 28.000. I thought the whole point of a quote was to plan your finances for retirement. Can the figure go down and if so, is it acceptable that it has reduced by nearly 15% in 2 years.

I would appreciate any advice on this matter.

Thank you

jamesd

Why do you care about that value, where lower is likely to be better because it uses less of the lifetime allowance? That's not the amount you'll get from a final salary scheme.

It may be reducing because the amount of money required to provide your pension income has been dropping as interest rates paid on gilts have increased.

Linton

Your final salary pension is guaranteed to pay the amount due each year, presumably inflation linked, when you retire. Its "value" is an actuarial/financial construct and makes no difference to you whatsoever unless:

a) You plan to try to move it out of the scheme which, except under special circumstances, is a very bad idea and difficult to do.

b) You are in danger of exceeding the maximum pension value (£1.5M now £1.25M from April) at which there are tax charges. If this were the case as Jamesd says smaller is better.

let_it_be

Thank you for your replies.
I thought this figure was the fund as its affected the cash lump sum I can take. I was first quoted a cash lump sum of 45.454 with a reduced pension of 5.648 and now [EMAIL="it@s"]it[/EMAIL]'s a cash lump sum of 38.683 and reduced pension of 5.802. Therefore, the cash lump sum has gone down by 6.771 and reduced pension increased by 144 a year. At my age the cash lump sum was better for me rather than 12 pound extra a month on my pension. I've read up on final salary pensions and they all say they should increase not decrease. Thats why I was taken back when the figure had reduced.

kidmugsy

let_it_be wrote: »

I was first quoted a cash lump sum of 45.454 with a reduced pension of 5.648 and now [EMAIL="it@s"]it[/EMAIL]'s a cash lump sum of 38.683 and reduced pension of 5.802. Therefore, the cash lump sum has gone down by 6.771 and reduced pension increased by 144 a year. ... I was taken back when the figure had reduced.

So am I. I assume the rules of the scheme must have been changed; otherwise I'm baffled. Except to say that one of my wife's final salary pension schemes had five different goes at telling her what her pension would be. Sheer incompetence, I think; the rules certainly didn't change during this fandango.

Linton

Were all the value figures "for testing against your annual allowance"? This I believe is based on simple calculations defined by HMRC and will be different to a transfer value which would take into account more complex actuarial and financial considerations.

I guess one possibility for the changing lump sum is that your scheme only guarantees the pension should you choose not to take a lump sum. If you want a lump sum then the scheme may be allowed to work something out that they consider equivalent. This will vary over time depending on interest rates etc. If this is the case you may find that the lump sum offer is not generous compared with the pension lost. If you gave the figures people here could comment.

The best way to get a definitive answer is to contact the pension administrators. They cant give advice but they should be able to give you factual information.

let_it_be

Yes it states for testing against your lifetime allowance. Even the quote I only got 5 months ago is different. It was pension scheme 164.453. cash lump sum 39.819 and reduced pension of 5.973. Now the January quote is 159.763. cash lump sum 38.683 and reduced pension 5.802. So in 5 months both lump sum and reduced pension are less.

This pension was started about 40 years ago and the Company have replaced it, and on their 3rd different pension now. I've spoken to someone in the pension dept and all they say it will take between 1 to 2 weeks to get a quote. As it's an old pension I dont think they exactly know what's what or do but just don't want to tell.

I'm worried now, when I retire in 2 months if it's going to go down again.

Cornucopia

Can I just say:



Comma is the standard way to divide large numbers in the UK.

let_it_be

I would like to say a lot of people were made redundant from this Company in the later part of last year and were pensioned off earlier. Would this affect my pension fund, the fact the Company fund is paying out more?

let_it_be

Your dead right. The quotes were in ,,,,,,,,. To me it never looks right so I just put full stops lol

Linton

I think I have solved most of it for you....

Looking at the HMRC website I find that the value of your pension "for testing against your annual allowance" when you take your pension is given by: Inflation X (20* pension + LumpSum), Inflation being say 1.03 for 3% inflation. This is purely for the allowance calculation, it is nothing to do with the real value of your pension. If you look at your data I think that gives approximately the right answer,

So the "value" is being driven by the pension and lump sum not the other way round. Why are your lump sum and annuity values changing?


Now into guesswork..

I guess the real value of your pension is determined by the cost of providing a pension if you had a zero lump sum. This value is dropping at the moment because interest rates are rising - less money is needed up front). Your lump sum is perhaps 25% of that value, which is therefore dropping.

I dont understand why the pension is dropping between your two most recent quotes - I would have expected it to rise both because of inflation and because you are taking the pension for a shorter period. That ties in with the figures for the first and middle quotes.

It would be much easier to understand and possibly more lucrative if you took your pension with no lump sum and at the default date.