Clarification on crystalising pension/s

greenglide

The scheme is offering enhanced amounts to rid themselves of the long term commitment?

jamesd

Maybe. Or has a workforce with long life expectancies and/or generous spousal benefits. Possibly combined with low investment growth assumptions, so needing large investment amounts to pay the benefits.

232607

jamesd wrote: »

Maybe. Or has a workforce with long life expectancies and/or generous spousal benefits. Possibly combined with low investment growth assumptions, so needing large investment amounts to pay the benefits.

Just to give some more info:-
its a fairly ageing workforce,mainly office based hence not manual labour. The DB spousal pension is 50% however the flat annuity route it being sold with 100% spousal pension.
This route is also being sold with a "cross over" age of typically 82 Y/O when the annuity route would have paid out the same as the DB route. This doesn't seem unreasonable to me, IE you only lose out after 82.
I agree with a previous post in that it seems strage that a common stratagy is being sold to all.
I doubt the scheme is in danger due to Co failure. Large multi National Co.

westy22

PensionTech

However, if you do trigger the £10k annual allowance, then any contributions in excess of £10k per year to a money purchase arrangement will have the tax relief reversed - i.e. you will have to pay an amount of tax called the Annual Allowance Charge, equivalent to what would have been payable on the contributions were they not tax-relieved, to HMRC.

In such circumstances how would HMRC deal with Employer contributions that exceeded the £10k pa maximum allowance?

kidmugsy

232607 wrote: »

This route is also being sold with a "cross over" age of typically 82 Y/O when the annuity route would have paid out the same as the DB route.

I suppose that calculation must involve some assumption about inflation rates. And it will depend crucially on the inflation protection offered by the DB scheme, in particular the question of whether it is capped (e.g. RPI-protection up to a maximum of 5% p.a.; that sort of thing.) Can you tell us about those?

jamesd

232607 wrote: »

its a fairly ageing workforce,mainly office based hence not manual labour. The DB spousal pension is 50% however the flat annuity route it being sold with 100% spousal pension.
This route is also being sold with a "cross over" age of typically 82 Y/O when the annuity route would have paid out the same as the DB route.

OK, so the scheme has employees who have life expectancies longer than average. Here are the 2010-based cohort life expectancies for various ages:

Age now males females
50 36.1 39.3
55 31.0 34.1
60 26.1 29.1
65 21.7 24.3
70 17.5 19.8
75 13.6 15.5
80 10.2 11.5
85 7.2 8.0
90 5.0 5.4
95 3.5 3.6

That might help to illustrate why an 82 year old break even point is a great deal for the pension trustees/employer and a poor one for the employees, particularly given the higher life expectancy likely for this workforce.

232607 wrote: »

This doesn't seem unreasonable to me, IE you only lose out after 82.

Most employees can expect to do that and given the nature of the workforce probably well over half of the men will do it by a decade or more.

Makes me wonder even more how the annuity IFA is pitching it without accumulating lots of mis-selling cases. The drawdown one can at least pitch investment growth and the potential for that to leave their group ahead at all ages. The annuity one pretty much has to pitch an initially higher income and low inflation hope, while also assuming no desire for higher inheritance.

I think that the employees need to get a truly independent IFA to look at the situation. Not one suggested by employer, union or any other party with a potentially vested interest. At least there's hope with the drawdown one, though.

232607

kidmugsy wrote: »

I suppose that calculation must involve some assumption about inflation rates. And it will depend crucially on the inflation protection offered by the DB scheme, in particular the question of whether it is capped (e.g. RPI-protection up to a maximum of 5% p.a.; that sort of thing.) Can you tell us about those?

The inflation protection in retirement breaks down in to 2 sections:-
For pension accrured pre 2002 - based on RPI but a min of 3% and max 5%.
For pension accrured after 2002 - based on CPI but to a max of 3%.

gadgetmind

westy22 wrote: »

In such circumstances how would HMRC deal with Employer contributions that exceeded the £10k pa maximum allowance?

In the same way as they handle any payment over your annual allowance, which is by taxing you on the contribution at your marginal rate.

I have sometimes mused that this could be worth doing if -
1) Someone can save 12% NI via salary sacrifice (and particularly if they also get a kick back from employer for saving employer's NI) AND
2) They will be able to drawdown their pension tax free via personal allowance sized chunks between retirement and SP age.

Note that both would have to be true.

Linton

232607 wrote: »

Just to give some more info:-
its a fairly ageing workforce,mainly office based hence not manual labour. The DB spousal pension is 50% however the flat annuity route it being sold with 100% spousal pension.
This route is also being sold with a "cross over" age of typically 82 Y/O when the annuity route would have paid out the same as the DB route. This doesn't seem unreasonable to me, IE you only lose out after 82.
I agree with a previous post in that it seems strage that a common stratagy is being sold to all.
I doubt the scheme is in danger due to Co failure. Large multi National Co.

As Jamesd has shown the 82 crossover age is not good compared with life expectancy. Another thing concerns me - as the proposed annuity is fixed whereas a DB pension would be index linked what inflation assumption was used to get the 82 figure?

Some real numbers would be interesting - eg how much DB pension due in how many years vs total transfer sum offered

232607

Linton wrote: »

As Jamesd has shown the 82 crossover age is not good compared with life expectancy. Another thing concerns me - as the proposed annuity is fixed whereas a DB pension would be index linked what inflation assumption was used to get the 82 figure?

Some real numbers would be interesting - eg how much DB pension due in how many years vs total transfer sum offered

I can't say what figures would have been used to work out index linking during retirement but what we do know is the maximum as stated earlier...Repeated here:-

The inflation protection in retirement breaks down in to 2 sections:-
For pension accrured pre 2002 - based on RPI but a min of 3% and max 5%.
For pension accrured after 2002 - based on CPI but to a max of 3%.

Would these not have been used, meaning that if RPI/CPI was lower at times during retirement it would have the affect of pushing the 82 figure further out due to the DB not rising as quickly as the maximum?