Advice on Defined Benefits Plan closure

bsmm228

Hi everyone

My husband is 59 this year and has 14 years service, he has been advised by his employer that they are closing the Defined Benefits Pension Plan as of 1.1.17. They are currently consulting scheme members on the options going forward.

Obviously his pension will be frozen, but he can join their Stakeholder pension scheme. He can pay in as much as 8% of his pensionable salary and they will contribute 12%. In addition they have said they will kickstart his pension by paying an additional 10% for the first two years.

He wants to retire in a couple of years time so my question is, is it worth him joining the stakeholder pension or should he just opt out?

Also as his existing pension will be frozen would it be in his interest to take it, they have said this is an option and he can continue working. This seems a no brainer to me, is there any danger in him doing this?

Any advice would be appreciated, he is about to have a one to one consultation and is really in the dark as to what questions he should be asking.

Thanks all

Malthusian

Even if he was retiring in a couple of months it would be worth joining the stakeholder scheme and contributing the maximum possible. Why turn down free money? (The 12% employer contribution.)

It would not usually be in his interests to take the defined benefit pension early, as they usually have a set retirement age (typically 65) and if you take benefits before this there is a significant penalty. You would need to check the exact terms but it would be unusual if there was any benefit it taking it early while you were still working.

A minor nitpick - the defined benefit pension will not be "frozen" as it will be increased in line with inflation until (and after) he draws it.

sandsy

Not joining would be to turn down a pay increment of 22% of salary. Even for a couple of years, it's worth it. You wouldn't turn down the cash, so don't turn it down in the form of payment into a pension.

Why take the DB benefit now? Especially if it's subject to a penalty for taking it early. Do you need it now? Probably better tax wise to leave it for the moment.

Paul_Herring

bsmm228 wrote: »

He can pay in as much as 8% of his pensionable salary and they will contribute 12%. In addition they have said they will kickstart his pension by paying an additional 10% for the first two years.

No brainer. Join.

The only potential risks are those normally associated with DC pensions, the most notable of which is the potential for the funds to decrease in value.

Since you appear to indicate he'll only be in it for a couple of years before potentially drawing on it, I'd suggest he mention that fact and ask about which low-risk funds are available for him to use within the fund, since possibly medium, and certainly higher, risk funds would be - I suggest - highly unsuitable for him.

xylophone

When the DB Scheme closes he will become a deferred member of the scheme.

What is the normal retirement age of the scheme or ( if different) the age at which he can take his scheme benefits without actuarial reduction?

AnotherJoe

bswmm228 wrote: »

Obviously his pension will be frozen, but he can join their Stakeholder pension scheme. He can pay in as much as 8% of his pensionable salary and they will contribute 12%. In addition they have said they will kickstart his pension by paying an additional 10% for the first two years.

He wants to retire in a couple of years time so my question is, is it worth him joining the stakeholder pension or should he just opt out?

Tough one, does he normally turn down free money ? If so, then he definitely shouldn't take it. If however he'd like to get around 20% extra money and pay less tax, that he can spend how he pleases in a couple of years, then taking it would perhaps be a good idea. :D:D

bswmm228 wrote: »

Also as his existing pension will be frozen would it be in his interest to take it, they have said this is an option and he can continue working. This seems a no brainer to me, is there any danger in him doing this?

[STRIKE]Yes, he'd likely needlessly pay tax on it when if he waited a couple of years, he wouldn't (or would at worse case pay less tax on it). And also his pension might be reduced for taking it early.[/STRIKE] EDIT <- deleted this as it could be wrong. See next two posts.

kidmugsy

If there's a special offer that would let him draw his DB pension early without an "actuarial reduction" he should seriously consider it, especially if there was to be no such offer if he chose to retire in two years time.

(The "actuarial reduction" arises because he'd be drawing his DB pension for more years than he would if he took it at the scheme retirement age.)

If there would be an actuarial reduction then his best plan might be as follows. (i) Fill the stakeholder to the maximum for a couple of years until (say) March 31st 2018. (ii) When he retires then, don't start the DB pension right away. Instead drawdown the stakeholder pension tax-free (or largely so) by using the tax-free lump sum and his Personal Allowance against income tax in tax-year 2018-19. (iii) In the next tax year, 2019-20, start the DB pension - it should be bigger than it would have been a year before because the actuarial reduction decreases the nearer he gets to scheme retirement age.

It would be worth having a go at the arithmetic to see how that might work for you.

AnotherJoe

Good point by kidmugsy, if there is no actuarial reduction for taking it now, then obviously you should, since again otherwise its turning down more free money, and perhaps use that money to put as much as possible into husbands pension and yours also.

Seems to me it would be very unusual if there isnt a reduction though, so he needs to find that out.

atush

sandsy wrote: »

Not joining would be to turn down a pay increment of 22% of salary. Even for a couple of years, it's worth it. You wouldn't turn down the cash, so don't turn it down in the form of payment into a pension.

Why take the DB benefit now? Especially if it's subject to a penalty for taking it early. Do you need it now? Probably better tax wise to leave it for the moment.

I agree with this 100%. Opting out is a barmy idea, as is taking the pension early when it is not required.

Opt in, and let it ride.

let it ride IF as kidmugsy says, it carries an actuarial reduction.