DuPont pension

bigfreddiel

My wife has a pension from DuPont for £27/ month, not indexed linked.

They want to pay her a lump sum, what should she expect to get.

fj

PensionTech

How old is she? Has she already retired? If not, what is her retirement age?

jamesd

There's no fixed amount. It depends among other things on:

1. How keen the scheme is to get rid of future liabilities and risk.
2. What the benefits of the scheme are, things like death benefit payments, pension for a spouse or inflation-linking.
3. The age of the person they are making the offer to.

Will she reach state pension age before or after 6 Apriil 2016? Assuming she's getting her state pension already, how much is she getting from that?

These offers can be a good deal. Not always. One thing to do is work out how much state pension can be bought with the money by deferring the state pension. You can defer once even if you have already claimed your state pension.

What is her health like? Another case where taking a lump sum can be best is where life expectancy is significantly lower than normal. In this case an annuity for those in less than normal good health might pay more. Maybe even more than deferring the state pension. The pension scheme can't get these rates but an individual can.

bigfreddiel

PensionTech wrote: »

How old is she? Has she already retired? If not, what is her retirement age?

Of course I rushed my query, she is 68. Has been taking the £27/month payment for 8 years now, and took no lump sum initially

Cheers fj

PensionTech

Then I'd guess anywhere between £2000 to £4000. And that really is a guess. There are a few things that the scheme/provider will have taken into account:
a) your wife's estimated remaining life expectancy (they might take a low-end figure for this as a "prudent" estimate), plus any benefits that they might be expecting to pay after her death
b) the investment return expected on the assets backing your wife's pension (they might take a high-end figure for this for the same reason)
c) administrative costs of cashing in the pension (though these might not have too great a bearing as there is a good argument that cashing in the pension will reduce administrative costs more in the long term).

So let's say your wife is assumed to live for 8 more years (very low-end, hopefully!), and the return on the assets backing the pension is assumed to be 3%, and there are no benefits payable after she dies - a very simplified calculation might indicate a lump sum of around £2300, and then maybe a deduction for expenses.

The lump sum would also be subject to income tax so the administrator may have quoted the amount with or without basic rate tax.

As has been said, there really isn't a fixed formula that you can use to work out what this kind of lump sum will be. The scheme just has to pay an amount that would extinguish the pension benefit, which is usually calculated on the rough basis of the net present value of the future payments due from the scheme. This might be plus or minus a wide margin, depending on how much the scheme wants to get rid of the benefit, or how prudent it is being in its assumptions - or even how long ago the calculation basis was updated.

The range I've given here shouldn't necessarily indicate that something close to £4,000 would be good value and something close to £2,000 would be bad value. The only reason I am giving any range at all is because I suspect you might have been given a value and think it is unreasonably low and should be contested; I am only saying "don't be surprised if it is in this range, I would consider it normal".

If you haven't been given a figure yet, then just hold tight and see what they offer. It's far too early to be making plans based on a figure that really could be anywhere. Listen to jamesd's advice above - it is far more valuable than my back-of-an-envelope calculations.

jamesd

bigfreddiel wrote: »

Of course I rushed my query, she is 68. Has been taking the £27/month payment for 8 years now, and took no lump sum initially

What is her state pension payment? Alternatively, that's to get data to work out how much it would cost her to defer her state pension long enough to get an increase of a particular amount. That would be index-linked so worth more than her current payment, so a lower amount than that would be appropriate.

Given her age she has access to the excellent 10.4% a year increase from deferring so I hope she's already planning to use that if her life expectancy is reasonable.

If the payment would be enough to buy £27/month of state pension through deferring it would be a good deal because this is index-linked. Break even might be around half of that amount, depending on what your and her inflation expectations are.

sandsy

A thorough response from PensionTech which represents the cost to the scheme.

Another way of looking at it is what it would cost you to replace the income. An annuity calculator suggests that it would cost a single premium of £5000 to replace the £27pm for life on a level basis (no spouse's benefits). I also did some back of the envelope calcs which suggested just under £5k based on 3% interest and 20 year life expectancy which isn't an in typical assumption for life annuities, on the most recent mortality tables used for pricing (not population tables).

bigfreddiel

Thanks for your replies everyone, given me some ideas.

Cheers fj