Actuarial Reduction

VickLad

I took early retirement a couple of years ago on an adequate pension until my state pension kicks in. So my pension planning was in place. I also have a small deferred DB pension which I left in 1983. Given what is going off with this pension at the minute I was looking at options to protect it as much as I can. As a pre 1997 pension if it goes into the Pension Protection Fund it will take a significant and ongoing reduction.

I only have 2.5 years to go before state retirement age but having received a quote for early payment of this pension it is only 46% of its current value at 65. A quick calculation using the long term RPI increase as applied to the pension suggest this will mean an overall reduction of around 40% of payable benefits assuming I live to 84.

Whilst being prepared for an actuarial reduction this seems rather a high rate of loss of benefit for paying out what would be less that £2,500 before it would normally be paid.

Can anyone suggest whether this seems reasonable or in line with other DB schemes or make any suggestion of what I can do quickly to protect this part of my pension planning?

HappyHarry

VickLad wrote: »

I only have 2.5 years to go before state retirement age but having received a quote for early payment of this pension it is only 46% of its current value at 65. A quick calculation using the long term RPI increase as applied to the pension suggest this will mean an overall reduction of around 40% of payable benefits assuming I live to 84.

Whilst being prepared for an actuarial reduction this seems rather a high rate of loss of benefit for paying out what would be less that £2,500 before it would normally be paid.

Can anyone suggest whether this seems reasonable or in line with other DB schemes or make any suggestion of what I can do quickly to protect this part of my pension planning?

That seems quite a steep reduction. Is the pension's Normal Retirement Date the same as your State Retirement Age?

I am looking at a DB plan in front of me that quotes a reduction to 55% if taken 8 years early, and a reduction to 70% if taken 5 years early.

Around 5% reduction per year is common place.

You already seem to understand the consequences if the fund falls into the Pension Protection Fund. Have you modelled the consequences of this, and found out how this compares to taking the pension early?

VickLad

Thanks for your response. I would be better off by leaving it until 65 even after applying the PPF reductions. My state retirement age is only a few months after 65.

My logic was that if the pension goes into the PPF say in the next 6 months it will be frozen with no increases until I can take it at state pension age and then subject to a 10% cut with no CPI increases. So I may as well get some benefit from it over the next couple of years. From that calculation there seemed to be little overall difference in total pension paid.

I am currently in receipt of a DB pension and so have lost the option of transferring it into that. This is an LGPS pension with a reducution of 16% if taken 3 years early.

HappyHarry

VickLad wrote: »

My logic was that if the pension goes into the PPF say in the next 6 months it will be frozen with no increases until I can take it at state pension age and then subject to a 10% cut with no CPI increases.

Even if the pension enters the PPF now, it should still increase in value until you reach the plan's Normal Retirement Date.

http://www.pensionprotectionfund.org.uk/FAQs/Pages/details.aspx?itemid=334&search=t&text=revalue&roleid=7&subjectid=4&datevalue=After&date=01%2f01%2f2012&ListOrder=PD

Given that the NRD is only 2.5 years away, you won't see any big increases, but it will be better than nothing.

Your other possible option is to look at transferring the CETV to a SIPP or personal pension. However, the CETV may be low if the pension fund is in trouble, so may not be financially beneficial to you.

VickLad

Thanks for the clarification, my misinterpretation of the PPF rules. I am going to get back to the Pension Fund to have the figures checked as a starting point as well as investigating the SIPP route.

zagfles

VickLad wrote: »

Thanks for your response. I would be better off by leaving it until 65 even after applying the PPF reductions. My state retirement age is only a few months after 65.

My logic was that if the pension goes into the PPF say in the next 6 months it will be frozen with no increases until I can take it at state pension age and then subject to a 10% cut with no CPI increases. So I may as well get some benefit from it over the next couple of years. From that calculation there seemed to be little overall difference in total pension paid.

In fact it's the other way round. If you take the pension early, you get no increases on pre-1997 service if it goes into the PPF.

If you haven't yet taken it, it's revalued until normal pension age.

In both cases, it's chopped to 90% if it goes into the PPF before normal pension age.

http://www.pensionprotectionfund.org.uk/Pages/Compensation.aspx

zagfles

VickLad wrote: »

I took early retirement a couple of years ago on an adequate pension until my state pension kicks in. So my pension planning was in place. I also have a small deferred DB pension which I left in 1983. Given what is going off with this pension at the minute I was looking at options to protect it as much as I can. As a pre 1997 pension if it goes into the Pension Protection Fund it will take a significant and ongoing reduction.

I only have 2.5 years to go before state retirement age but having received a quote for early payment of this pension it is only 46% of its current value at 65. A quick calculation using the long term RPI increase as applied to the pension suggest this will mean an overall reduction of around 40% of payable benefits assuming I live to 84.

Whilst being prepared for an actuarial reduction this seems rather a high rate of loss of benefit for paying out what would be less that £2,500 before it would normally be paid.

Can anyone suggest whether this seems reasonable or in line with other DB schemes or make any suggestion of what I can do quickly to protect this part of my pension planning?

It's a ridiculously high reduction. It might have something to do with a technicality known as GMP franking - in summary the GMP (a part of your pension relating to NI rebates) usually rises at a high fixed rate and the excess above the GMP rises at a lower rate.

If you retire early, the GMP can be "franked" against the excess which means they use the excess to pay the GMP increases. If you retire at normal pension date they can't.

VickLad

From the PPF purple book 2012 Chapter 11 (sorry not allowed to post links)



PPF Compensation
11.1 Summary


When an eligible Defined Benefit (DB) scheme transfers into the PPF, the PPF
generally pays a starting level of compensation of 90 per cent of scheme pension
(subject to a compensation cap) to members who were yet to reach their normal
retirement age (NRA) at the date the scheme entered assessment. The PPF will
generally pay a starting level of compensation equivalent to 100 per cent of
scheme pension to those who were already over their NRA at the start of the
assessment period

My interpretation of this was that the assessment of compensation was taken at the time the scheme went into the PPF effectively freezing the benefits until NRA when the 10% cut would be applied.

I've never come across the GMP Franking issue, it does seem technical but having made a quick call to the pension fund and a quick internet search it is beginning to sound like it may be related to that. I’ve asked the Pensions Fund to check the calculation and provide an explanation.


It is increasingly looking like my best option is just to leave it where it is.

zagfles

VickLad wrote: »

From the PPF purple book 2012 Chapter 11 (sorry not allowed to post links)



PPF Compensation
11.1 Summary


When an eligible Defined Benefit (DB) scheme transfers into the PPF, the PPF
generally pays a starting level of compensation of 90 per cent of scheme pension
(subject to a compensation cap) to members who were yet to reach their normal
retirement age (NRA) at the date the scheme entered assessment. The PPF will
generally pay a starting level of compensation equivalent to 100 per cent of
scheme pension to those who were already over their NRA at the start of the
assessment period

My interpretation of this was that the assessment of compensation was taken at the time the scheme went into the PPF effectively freezing the benefits until NRA when the 10% cut would be applied.

The purple book is a summary of risks etc, not the rules, the links posted above show that deferred pensions do increase in deferment, but not (for pre-1997 service) in payment.

"
My scheme has transferred to the PPF, but it will be some time before I reach the scheme’s pension age and I start receiving compensation. Will my compensation increase while I wait for it to be paid?

Compensation will increase annually in line with inflation between the time your former employer went bust, and the date your compensation comes into payment. This annual increase will be subject to a cap of 5% for compensation linked to pensionable service prior to 6 April 2009, and a cap of 2.5% in respect of compensation linked to pensionable service on or after 6 April 2009."

I've never come across the GMP Franking issue, it does seem technical but having made a quick call to the pension fund and a quick internet search it is beginning to sound like it may be related to that. I’ve asked the Pensions Fund to check the calculation and provide an explanation.


It is increasingly looking like my best option is just to leave it where it is.

Do your statements show the GMP and excees above the GMP split?

VickLad

The statements simply give a Deferred Benefits at time of leaving and Value of deferred at end of statement year.

When I phoned they suggested there is a guaranteed amount at retirement age. This is was new news as its not mentioned on any statement.

I've been going through the paperwork and in the details provided when I left the scheme in 1983. It quotes a figure for Membership for the scheme and a figure for accrued benefits whilst contracted out of state graduated schemed. The graduated pension benefit is marginal compared to the total pension , less than one percent.

zagfles

VickLad wrote: »

The statements simply give a Deferred Benefits at time of leaving and Value of deferred at end of statement year.

When I phoned they suggested there is a guaranteed amount at retirement age. This is was new news as its not mentioned on any statement.

I've been going through the paperwork and in the details provided when I left the scheme in 1983. It quotes a figure for Membership for the scheme and a figure for accrued benefits whilst contracted out of state graduated schemed. The graduated pension benefit is marginal compared to the total pension , less than one percent.

Graduated was pre 1975, GMP/SERPS was from 1978. Might be wotrh asking them what the GMP is. Should be on the statements really. Assuming it was contracted out of SERPS.