Pension increase in exchange for foregoing future inflation - advice

danlightbulb

Thanks everyone for the help. He is pretty well decided its what he wants to do. I'll tell him to consider asking if the provider can make an improved offer though.

mgdavid

Hang on, you said in your OP that he will find '...a decent interest rate savings account for the extra he doesn't spend.'
If he's not going to spend it, why does he want to take extra now and introduce the real risk of being poor in old age?
Also ask yourself 'why is the employer / pension company making this offer?'.
They will not be doing it out of generosity towards your father !!! They are doing it because it will save them money, i.e. he will get less from them.
I don't see any compelling reason to consider this.

danlightbulb

He is of the view that the money now is worth more to him than in 12+ years time.

If my work offered me a 40% payrise now but said that would be it for 20 years I'd jump at it.

Malthusian

If my work offered me a 40% payrise now but said that would be it for 20 years I'd jump at it.

Me too, but then I'd find a new job in 5 years' time, which isn't an option for a pensioner.

But your dad is quite right, he will get more benefit out of extra income now. And when he gets his State Pension, that will be better than index-linked. It doesn't sound as if your Dad has an expensive lifestyle, and State Pension increases are likely to cover increases in the cost of basic necessities, while increases in the cost of luxuries will be covered by your Dad buying less of them as he grows older. So the chance of being impoverished by this decision is quite low.

This is not a zero-sum game as mgdavid implies, it is perfectly possible for your Dad to be a winner because he gets less money over his lifetime but more value, and his scheme to also be a winner because they pay out less over his lifetime. The insurer places less of a priority on money now than your Dad does, because Dad is going to age and die and the insurer isn't. So it makes perfect sense for them to trade money now for money in the future.

greenglide

This is not a zero-sum game as mgdavid implies, it is perfectly possible for your Dad to be a winner because he gets less money over his lifetime but more value, and his scheme to also be a winner because they pay out less over his lifetime. The insurer places less of a priority on money now than your Dad does,

But the father has a spouse who seems to be missed out on this.

The spouse benefits from a DB scheme are often half of the members's pension. Should your father die first then the surviving spouse would have potentially lost out on the inflation linking.

The pension provider will cost these things on the joint lives as this is the real cost but everything here seems just to concentrate on one life, that of the father.

saver861

greenglide wrote: »

But the father has a spouse who seems to be missed out on this.

The spouse benefits from a DB scheme are often half of the members's pension. Should your father die first then the surviving spouse would have potentially lost out on the inflation linking.
.

Well there may be some lump sum payment if the father dies early in retirement. There normally is some form of payment in a DB scheme if someone dies early. Of course, he would need to check that would still be the case under any change.

If the spouse does live a long time then that would impact but of course, the spouse would only have half so any loss impact would be 50%. That said, if you are working on pretty low numbers then that 50% would be more relevant.

It would also depend on the spouse's own pension position.

[Deleted User]

My Dad had this offer which he took having considered...

Crossover point
Age now
Health
Other pensions
Savings
Wife's pensions
Etc

For him it was a no-brainer to enjoy the extra income now as he will never be poor.

Everyone's circumstances will be different though.

Thrugelmir

danlightbulb wrote: »

If my work offered me a 40% payrise now but said that would be it for 20 years I'd jump at it.

That's human nature. Short term view and thinking. Jam today.

The question I would ask is why. No business does anything (financial) without good reason.

rpc

greenglide wrote: »

But the father has a spouse who seems to be missed out on this.

The spouse benefits from a DB scheme are often half of the members's pension. Should your father die first then the surviving spouse would have potentially lost out on the inflation linking.

It will vary from scheme to scheme so OP needs to check. The spouse pension may be fixed and not dependent on OP's choices.

saver861

Thrugelmir wrote: »

The question I would ask is why. No business does anything (financial) without good reason.

Its a gamble for them also - if the client dies within the 12 year break even time then they have lost. Equally, they stand a good chance to gain by not having to pay out as much over the long term.

However, as the OP says, the money might be more relevant in early retirement rather than later.

The overall advantage has to be with the business otherwise they go bust, but this is a cost v benefit scenario.