Question about final salary pension

Seamonster_2

I’m trying to understand roughly how much I’ll receive in retirement from a final-salary pension I had with a previous employer – hope someone can help.

I requested a pension statement from them and the (rounded) figures are:
Contributing years: 12 (1995 to 2007)
Entitlement at date of leaving: £7,500
Entitlement at NRD (in 2032): £15,000

£15,000 is more than I expected, so I Googled for a formula to try to corroborate that figure. I found this one (on the monetos website):
Annual pension = (years x accrual rate x pensionable salary)

I don’t know the accrual rate, so assumed 1/60, which I think is a fairly generous one. The calculated figure was £7200, which roughly ties in with the £7500 above.

My question is: where do they get the entitlement of £15,000 from? Is it assuming that the pension fund will have doubled in size between 2007 and 2032, even though I’m no longer making contributions? That seems unrealistic to me, but maybe I don’t fully understand how final salary schemes work.

I need to get some clarity on this, in order to decide whether or not to increase my pension contributions with my current employer.

p00hsticks

Does it not explain it in the statement ?

The £7,500 at the time you left will have been calculated as you said - number of years service x final salary on leaving x accrual rate.

Once you leave, I beleive it's usual for that figure to be increased by a certain percentage grwoth each year - I imagine that in the 25 years between 2007 and 2032 the compounded rate is such that it causes the starting aount to double to £15k

audigex

p00hsticks wrote: »

Does it not explain it in the statement ?

The £7,500 at the time you left will have been calculated as you said - number of years service x final salary on leaving x accrual rate.

Once you leave, I beleive it's usual for that figure to be increased by a certain percentage grwoth each year - I imagine that in the 25 years between 2007 and 2032 the compounded rate is such that it causes the starting aount to double to £15k

I'd agree with this - compound interest is a beautiful thing and at a reasonable-sounding 3%/year does give a "time to double" of around 25 years.

AlanP_2

Putting aside any GMP elements of a deferred DB scheme which have specific rules most of them increase using RPI or CPI depending on their rules.

So the £15k will be based on £7.5k increased by annual RPI / CPI (maybe with an upper limit of say 5%) since leaving to get to a "today" amount which is then rolled forward at an ESTIMATED RPi / CPI percentage for the remaining years, typically around 3% or so for mine.

This figure will be updated each year as "actual" RPI / CPI is applied for the previous year and then rolled forward again so I see my annual pension at NRD decreasing slightly with each new forecast at the moment as CPI is nowhere near the 3% estimate factor they use.

The longer you have until drawing it and the lower CPI is in that period the more effect that will have on the accuracy of the forecast provided.

xylophone

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

may be worth a look.

Do you not have a scheme booklet? This would normally have a section on deferred pension.

molerat

£7500 in 2007 increased by RPI is worth £9868 now and projected forward by 2.5% annually is around £14650 in 2032. Find out your scheme rules and the annual uplift method and work it out going forward.

I had a preserved pension from 1994 and kept a spreadsheet adding the RPI increase up until it became active in 2009. My figure was 0.2% out on the actual pension paid

greenglide

But the GMP (assuming that there was one) would have been revalued as well - this could make a significant difference. I am not convinced that the scheme booklet would state that?

sandsy

The £15k is simply an estimate of what it will be worth once it's increased for inflation each year which has to be done by law. Different elements of the pension may have slightly different rates of inflationary increase. But if you think of it as an inflationary estimate, then you're thinking along the right lines.

So if, in practice, inflation is less than they've assume din the estimate, the final income paid will be lower, and vice versa.

Seamonster_2

Thanks for the replies. Having had the calculations explained, I can see that the £15K figure is actually more realistic than I thought, so that's good news!

LXdaddy

sandsy wrote: »

The £15k is simply an estimate of what it will be worth once it's increased for inflation each year which has to be done by law.

The problem with taking the estimated figure at 2032 as £15K, if that is the result of the revaluation for something like inflation is - that's £15K in 2032 pounds not £15K in today's money.

The price of your basket of shopping will have (roughly) doubled by 2032 so it will take twice as many pounds to buy then as it does today. So the buying power of £15K in 2032 will be something like the buying power of £7500 today.

All my pension projections are expressed in today's value. to give a more understandable idea of what it will be "worth".

molerat

LXdaddy wrote: »

The problem with taking the estimated figure at 2032 as £15K, if that is the result of the revaluation for something like inflation is - that's £15K in 2032 pounds not £15K in today's money.

The price of your basket of shopping will have (roughly) doubled by 2032 so it will take twice as many pounds to buy then as it does today. So the buying power of £15K in 2032 will be something like the buying power of £7500 today.

All my pension projections are expressed in today's value. to give a more understandable idea of what it will be "worth".

Which is why I posted

molerat wrote: »

£7500 in 2007 increased by RPI is worth £9868 now and projected forward by 2.5% annually is around £14650 in 2032.