Logic Check

AlanP_2

I have a deferred DB scheme that covers my employment 82-92 and have recently had an update on estimated pension and the two options I will have at Age 60 (2019).

From the letter:-


Option 1 - Pension of £8,897.52 p/a from Age 60.

Option 2 - Tax Free PCLS of £29,483.08 plus a reduced pension of £4,422.42 p/a.

With Option 2 the pension will increase to at least £7,559,24 p/a at Age 65 (GMP payment age). This will be a one-off big increase at 65 as opposed to a steady increase year on year (although the pension in payment increases as well I believe but at much lower rate than the 7.5% p/a GMP rate applied).

No indication of whether the Option 1 pension would rise at Age 65 to reflect GMP element or not.

They have assumed a CPI increase rate of 3% for the portion over and above the GMP.


I have no need to decide for a while yet as you can see but in terms of planning at this stage what option do you think looks most advantageous?

My initial thinking was take Option 2.

BTW - I am assuming I will still be working at 60 and still a member of the LGPS with a very reasonable pension being paid from that at 65.


Thanks.

Linton

Look at it this way: by taking option 2 you would be giving up an inflation linked pension of about £4500/year for a lump sum of about £29K. Could you guarantee an £4500 inflation linked income from a £29K lump sum? Answer: you couldnt, nowhere near. An annuity would be nearer £1K. In fact its so far out something must be wrong.

To make a proper comparison we need to know what happens with the £8897 pension and GMP. But even if the £8897 pension doesnt benefit its still more than £1K above the reduced pension + GMP. So on the data given it seems better to go for the full pension everything else being equal. Just covering the period between 60 and 65 would use up over £20K of the lump sum.

jamesd

On the numbers option 2 makes no sense but I agree with Linton that there's probably a mistake or missing number somewhere.

xylophone

There is something not quite right here.

OP, do you have your scheme booklet and a statement of deferred benefits at leaving?

Does the statement show pre 88 GMP, post 88 GMP and the excess?

From what you are saying, it would appear that your GMP is

revaluing by the fixed rate method. See http://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/18/what-is-a-gmp/

so almost certainly a private sector COSR scheme.

You left after 1991 so the excess must also revalue, albeit by a different percentage.

http://www.barnett-waddingham.co.uk/comment-insight/blog/2012/07/24/revaluation-for-early-leavers/


Your scheme pension age is 60 but your GMP age is 65.

Your scheme must pay you a pension at least equal to the revalued GMP from GMP age.

What seems to happen in your scheme is that at age 60 you are paid the revalued excess plus the unrevalued GMP (the GMP at leaving)- the excess will increase in payment by whatever the scheme rules require and then at GMP age, the pension will be increased by the revalued GMP- presumably after that the whole pension will increase with inflation under scheme rules?

And if you take the lump sum and reduced pension, or the pension without lump sum at 60, presumably some allowance is being made somewhere for the unrevalued GMP?

AlanP_2

Thanks all.

I have a copy of the original scheme booklet, a preserved pension certificate, a couple of "latest estimate" letters at various points in time and documents relating to transfer values and benefit levels when transferring it onto other schemes has been an option (but never taken).

The preserved pension certificate as at August 1992 states:

GMP - £801.84 at point of leaving and estimated as £7559.24 at normal retirement age of 65.

Balance of Digital pension - £1092.06 at point of leaving and estimated as £5203.63 at normal retirement.

TOTAL ANNUAL PENSION = £1893.90 at point of leaving and £12762.87 at 65.

In addition there was an AVC pot that provided a pension of 310.44 at point of leaving, increasing to £1479.25 at 65.

January 1999 estimate at Age 60 was £9359.35 p/a for all of above (GMP + Digital + AVC).

July 2004 estimate at Age 60 was £9710.93 p/a for all of above (GMP + Digital + AVC).

Finally from a recent email exchange with the administrators:

"The normal retirement date (NRD) for the Digital Section is age 65, however the Trustees have allowed members to take their benefits from age 60 unreduced (without an early retirement factor applied)."

GMP rises at fixed rate of 7.5% p/a whilst revaluable element above GMP rose by RPI up until December 2010 when it switched over to CPI.

1999 and 2004 estimates used 5% for RPI whilst current one in original post uses 3% for CPI going forwards.


Does that help shed any further light onto things?

xylophone

What is the split between pre 88 and post 88 GMP?

This is important once age 65 is reached as the Trustees have no obligation to inflation link the pre 88 GMP or anything above 3% of the post 88 GMP.

Looking at the figures, the GMP revalues at fixed rate of 7.5% but the excess does not actually revalue at a fixed rate of 5% or 3%?

If your scheme is following the rules as set out in the BW link, the excess revalued at RPI up to 5% at least until 2009?

Did your scheme change revaluation to RPI up to 2.5% in 2009 and have they now switched to CPI or CPI up to 2.5%?

At age 60, if you do not take a lump sum, is the figure cited made up of GMP revalued to age 60, excess revalued (estimate) to age 60 and the AVC? Or does it include the GMP revalued to age 65?

How is the value of the AVC calculated?

How would the pension taken at age 60 increase in payment?

Have you yet obtained a new style statement for your State Pension?

https://www.gov.uk/government/news/millions-more-offered-free-pension-statement

AlanP_2

Thanks xylophone - Answers that I can give and additional information below.

xylophone wrote: »

What is the split between pre 88 and post 88 GMP?

This is important once age 65 is reached as the Trustees have no obligation to inflation link the pre 88 GMP or anything above 3% of the post 88 GMP.

I joined the Digital scheme in May 1989 and the pension that was transferred in would have started in about 1982.

Looking at the transfer in paperwork I have my previous pension had a GMP at Age 65 of £6393,04.

xylophone wrote: »

Looking at the figures, the GMP revalues at fixed rate of 7.5% but the excess does not actually revalue at a fixed rate of 5% or 3%?

If your scheme is following the rules as set out in the BW link, the excess revalued at RPI up to 5% at least until 2009?

Did your scheme change revaluation to RPI up to 2.5% in 2009 and have they now switched to CPI or CPI up to 2.5%?

The excess was at RPI up until 31 Dec 2010 when it switched to CPI up to a maximum of 5% for each complete year in deferment up to age 60.

The working assumption they are using now is a 3% CPI rate until age 60 (2019).

xylophone wrote: »

At age 60, if you do not take a lump sum, is the figure cited made up of GMP revalued to age 60, excess revalued (estimate) to age 60 and the AVC? Or does it include the GMP revalued to age 65?

Quoting exactly from the letter:

Estimated Retirement Options (age 60):

Option 1 - A Full Pension of £8,897.52 p.a.

OR

Option 2 - A maximum PCLS of £29,483.08 plus a total reduced pension of £4,422.42 p.a.*

*This Pension in respect of Option 2 will increase to at least the minimum of £7,559.24 p.a. at GMP payment age (65).

Please note that the figures quoted are for illustrative purposes only and are based on current actuarial assumptions, which are subject to change. They include your previously transferred in benefits and your In-Plan AVC's.

xylophone wrote: »

How is the value of the AVC calculated?

No detail but include in overall number somehow as per above. FYI the transfer value as at October 2009 was £8,975.98 for the AVC pot if that is relevant or helpful.

xylophone wrote: »

How would the pension taken at age 60 increase in payment?

No information included.

xylophone wrote: »

Have you yet obtained a new style statement for your State Pension?

https://www.gov.uk/government/news/millions-more-offered-free-pension-statement

I have one from a couple of months ago based on old(current) scheme which is £113.10 basic plus 0.27p p/w SERPS as I have been contracted out or self-employed for most of my working life. I can apply for a new style statement after April 2016 it said.

Would you expect that to be any better?

xylophone

With regard to the new state pension, have a look at this

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/210299/single-tier-valuation-contracting-out.pdf

Contracting out will end for LGPS in 2016, by which time the BSP under current rules could be around £118 a week, which will be close to your Foundation amount by the looks of things - like the chap in the illustration you should be able to increase this before you reach State Pension Age in around 2025?

You transferred from one Final Salary Scheme to another in 1982?

Presumably this simply bought you roughly equivalent benefits in the


Digital Scheme
It would be useful for you to know the GMP split pre and post 88.

The Trustees should be able to advise you of the current value of your revalued GMP, excess and AVC?

What does your scheme booklet say about how pensions increase in payment?

If you took option 2 how much of the pension at 65 would be GMP and subject to the pre88/post88 increase rules?

I must say that I am having problems reconciling the figures.

You might try a pm to SnowMan who is pretty good with these calculations. https://forums.moneysavingexpert.com/discussion/comment/67746777#Comment_67746777

Do you have the option of delaying your pension to age 65?

AlanP_2

Thanks again, I appreciate you taking the time to look at all this.

xylophone wrote: »

With regard to the new state pension, have a look at this

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/210299/single-tier-valuation-contracting-out.pdf

Contracting out will end for LGPS in 2016, by which time the BSP under current rules could be around £118 a week, which will be close to your Foundation amount by the looks of things - like the chap in the illustration you should be able to increase this before you reach State Pension Age in around 2025?

OK, so if I have understood that correctly - If I carry on working from 2016 onwards then each extra year adds to my State Pension as the LGPS scheme will not be contracted out any more.

Is that correct?

xylophone wrote: »

You transferred from one Final Salary Scheme to another in 1982?

Presumably this simply bought you roughly equivalent benefits in the Digital Scheme.

No, when i joined the Digital scheme in 1989 I transferred in from my previous employer's DB scheme that I had been a member of since 1982.

xylophone wrote: »

It would be useful for you to know the GMP split pre and post 88.

Pre 88 will be approximately 6/10ths and post 88 would be 4/10ths just based on length of pension membership in the combined DB schemes from 82 to 92 but I guess it isn't as straightforward as that as my salary increased by a factor 6 over that period.

xylophone wrote: »

The Trustees should be able to advise you of the current value of your revalued GMP, excess and AVC?

I will contact the administrators and ask.

xylophone wrote: »

What does your scheme booklet say about how pensions increase in payment?

Quoting from the booklet:

It is the policy of the Trustees to review pensions in payment on a regular basis. Discretionary increases may be awarded on the basis of prevailing economic conditions and the Plan's financial situation.

That part of your pension which is called the GMP is protected against inflation before and after you retire.

xylophone wrote: »

If you took option 2 how much of the pension at 65 would be GMP and subject to the pre88/post88 increase rules?

Looking at the numbers I would have to say the £7,559.24 value as that has been the consistent Age 65 GMP value since the Preserved Pension Certificate was issued in 92 and is still being quoted in the last estimate that prompted this thread.

What may be a further complication arises from the notes that accompany the certificate:

The Revalued GMP has been subject to increases by the fund at 7.5% per annum compound for each complete tax year between date of leaving (nb Aug 92) and age 60 (nb Aug 2019).

Yet the GMP value of ~7.6k is at Normal Retirement Date which is Age 65.

Again from the certificate notes:

The balance of your Digital Pension (shown under item 2 of the attached certificate) has been subject to increases of 5% per annum for each complete year from your date of leaving to age 65 (actual increases will be the lesser of of 5% or the rate of inflation).

So for me this means I have had 18 years at RPI or 5% up to Dec 2010 and then 4 years at CPI / 5% up until Aug 2014 with a further 10 years (or 5 years if I draw it at 60 in 2019) at CPI / 5% to come. As I said earlier they have used 3% from here on in their estimate up to Age 60.

I haven't worked through the numbers as yet but an Excess of GMP pot worth £1092.06 p/a and an AVC pot worth £310.44 p/a in Aug 1992 would be worth more than the current estimated pension over and above the GMP value I would think.

Every time I have had an estimate I have thought that the value over and above GMP seems to be low and getting lower each time.

xylophone wrote: »

I must say that I am having problems reconciling the figures.

You might try a pm to SnowMan who is pretty good with these calculations. https://forums.moneysavingexpert.com/discussion/comment/67746777#Comment_67746777

I will.

xylophone wrote: »

Do you have the option of delaying your pension to age 65?

And we are back to the beginning

That was the question I put to them about 3 months ago when I started looking at retirement finances and planning in a bit of detail.

I had a good idea of the Age 60 total value (~£9k) from earlier estimates but working on the assumption that I would be working past 60 and not need the income I asked what the options / benefits were of deferring until a later date and got the reply quoted earlier about benefits unreduced at Age 60 and the latest estimate and Age 60 options.

I am assuming therefore that there is no benefit of delaying payment beyond the Age of 60 unless I am missing something or need some other detail from them.

AlanP_2

Snowman cannot accept any more PMs as his mailbox is full.

greenglide

Don't forget that with an SPa date later than 5/4/2016 the GMP inflation proofing by the state (all of GMP for pre 88 and above 3% for post 88) will not occur.

The scheme has no duty to take over this but they may decide to be generous!

Is this the Digital scheme as in Digital Equipment Corporation ( DEC ) now HP. If so I assume HP is still funding it?