Another difficult decision

teddysmum

My husband's pension goes up annually by the RPI up to a maximum 5%, but he has now had a statement offering a higher pension, in exchange for no further increases.


Of course, as they state we don't know what future RPI rates will be but quotes crossover estimated ages of 92, if the RPI(average) is 1%, 77 for 3% and 73 for 5%. (ie ages at which the fixed payment will become less than under the present system.)


It also estimates the break even ages as 127 for 1%, 87 for 3% and 79 for 5%. (ie the ages beyond which one would receive less , in total , if going for the fix).


He's 66, but it's a real dilemma as the fix is an increase of 37% on both his pension and that payable to me, as a widow.

mgdavid

the pension scheme/company is not a charity, ask yourself why they are making this seemingly generous offer!.

Fairly obviously because they think it will save them money in the long run - to your detriment.

xylophone

Timeo Danaos et dona ferentes? :eek:

My relative's comment was much the same as mgdavid's when the question was put to him - mind you, his scheme is RPI uncapped.

And presumably the 37% is gross - looks rather less generous when the tax is taken off.

My inclination would be to stick with the status quo but then I'm a conservative old soul who had a classical education....

xylophone

http://www.telegraph.co.uk/finance/personalfinance/pensions/10095284/Should-you-turn-down-a-30pc-pension-rise.html

http://www.towerswatson.com/en-GB/Insights/Newsletters/Europe/UK-Corporate-and-Trustee-Briefing/2015/03/PIE-out-bringing-buy-out-within-reach-for-many

might be of interest.

kidmugsy

Timeo Danaos et dona ferentes: yeah, I'd heard that they were going to West Ham.

kidmugsy

It's likely to be worth your while only if there is a substantial asymmetry of information e.g. you two have objective reason to expect to be short-lived which the pension scheme doesn't know about. Otherwise it's just the scheme's way of trying to shed horribly expensive liabilities.

A second feature that might make it worthwhile would be if you had a super use for the extra income that you can't afford to use at the moment. F'rexample: take the bigger pension and have him stop taking his State Retirement Pension (and you too if yours starts on or before before 5/4/16, and if you could afford to). That buys extra state pension at a rate of 10.4% p.a. for each year of suspension (they call it "deferral"). He can do it for three or four years, say, and you for five. Work out how much bigger your state pensions will become. The extra state pension will have inflation protection without (at the moment) a cap on it, and it's largely heritable by the surviving spouse.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf

Well worth mulling over.

teddysmum

The pension provider has sent a brochure, with figures tailored to individual clients, giving the information as in the Telegraph link above and offers a Freephone consultation with a financial advisor (stated as independant), who has actually prepared the quotations, together with life expectancy figures for males and females of various ages..


My husband's pension is somewhat less generous than the £20000 in the article, so differences in total, after the break even ages will not be as extreme.

It is tempting in that break even with RPI rate of 3% is age of 87, as by then I would imagine one's outgoings to be somewhat less, as one slows down. My health isn't good, though not life threatening, so will restrict our activities somewhat, as time goes by, thus making more money now tempting.


My mother died in her late 50s (cancer) and my father aged 79 (Parkinson's. My husband's father also died in his late 70s(long standing heart problems) but his mum is alive in her late 90s, though she has had dementia for several years, so who knows how long the two of us will live (though with the exception of mother-in-law, before 87 seems a good bet) ?


Kidmugsy, : Being 66, we both already take our state and private pensions (mine being small from a short teaching career), but my husband is continuing to work at the moment.


Xylophone : A 37% increase on gross still gives a 37% increase in the after tax amount. (eg £1000 gross increases by 37% to £1370 . Net these become £800 and £1096, giving an increase of £296 which is 37% of £800)


We don't have any debts or expensive lifestyle, but the RPI is an unknown and has varied a lot over the last 20 years.


If only we could predict that it would stay at 3% or less.


As I said: A dilemma (to be faced by early September).

Peelerfart

If it was me,and this purely an opinion I would take it.

An RPI increase is of little use when your in a retirment home,but having it now whilst fit and healthy(ish) sounds much better.

I am 100% willing to accept others have a different view.

atush

I would take it too, but only if I deferred SP

kidmugsy

teddysmum wrote: »

Being 66, we both already take our state ... pensions but my husband is continuing to work at the moment.

Yeah, but you can reap the reward by stopping it. Read the link. On the other hand, you may not be tempted to take the bigger pension and then effectively spend the boost on buying extra State Pension, if the original purpose of the bigger pension was to allow bigger expenditure.



It's up to you two whether you assign greater value to (i) capped RPI-linking on a larger annual sum (the occupational pension), or (ii) uncapped CPI-linking on a smaller one (extra state pension), plus a bigger flat rate pension.

It's guesswork. Even a couple of years' worth of 70s-style inflation would undermine not just the flat rate pension but also the capped RPI-linked one. Whereas the latter would be excellent protection from many years of 2%-5% p.a. RPI inflation.

I suppose one possibility is that you both trot off to the GP to see if he's prepared to make any sort of guess at your lifespans. But would such a guess have any merit anyway, short of some new symptoms or test results turning up?

By the way, do you (wife) pay income tax? Do the two of you have much spare capital?

teddysmum

My husband pays income tax, but I don't and am in the process of giving him the remainder of my allowance, which is not the full £1060. We do have savings, including a lump sum taken at commencement of his pension.


I had no choice with my pension and had to take a lump sum, which was spent on the house. We have enough set aside for the remainder of the work required ie new kitchen, replacement glazing and decoration.