Lifetime allowance Q.

aldershot

When measuring the DB part for LA, do you take it as 20x the income that would be available at the measurement date or the future defined benefit at the stated retirement age? ( I assume the former?).

I am a deferred member of a scheme I left in 2000. The benefit was modest at the time, £5,800 pa, but uprates at 5% or RPI (whichever is greater) until my retirement age which is quoted as 62. Well, 5% compounding doing its work and according to my calculations, my pension should be around £19k pa in 2025 when i reach 62. So this would have a value of £380,000 at that point. The issue is, my DC pot is now knocking on £600,000 and I need to think about managing it. I am looking to retire this year and shovel whatever else I can in the DC pot but don't want to over do it. I think my DB plan is now worth about £12,500 pa (17 years of 5%) and is that the figure that I should x20? I didn't plan on accessing it early (given the guarantee) so I was thinking of crystalising the DC pot at 55 next year, taking out 25% and leaving the rest in deferred drawdown. I should be well under the LA at that point (600k + about 13k*20)

Have I understood the DB bit correctly?

PensionTech

Hm. It depends what you want to measure and why.

If/when you crystallise the DC pot next year, the LTA used up by the DC pot will be whatever the fund value is at that point as a percentage of the standard LTA (currently £1m). So £600k, or 60%. But the DB pot remains uncrystallised at that point so it doesn't use up any LTA and its value is irrelevant.

When you come to draw on the DB pension at age 62, that's when you crystallise it - so that's when you do the 20 x pension calculation. So let's say it is indeed £19k per year, or a value of £380k, at 62. If the standard LTA of £1m remains in force, you'll be using up another 38% of it with the DB pension, so you'll hit a total of 98%.

If the LTA has gone up by that point, say to £1.5m, the DB pension will use up less - in our example, about 26% - of the LTA, so your total including the 60% previously crystallised with the DC pot will be around 86%. Conversely, if the LTA goes down - say to £750m - then your DB pension worth £380k will use up more, 51% in this case, of the LTA. So your total will then be 111%.

But the LTA has only existed for just over a decade, and many question its staying power, so it may not even exist by the time you hit 62 - or it may have changed significantly. The last government said that LTA wouldn't be cut below £1m and would rise (I think with effect from 2018) in line with inflation in future. Even if the LTA does stick around, we don't know whether or not the current government want to stick to that promise. And every time the LTA has been cut (or introduced) so far, there have been opportunities for people to take out protection if they expect to exceed the new lower LTA, so you shouldn't let that worry you too much.

Does that help?

aldershot

That really helps thank you. I don't want to touch the DB pension before 62 as it's my base income and has great guarantees pre and post retirement. I didn't understand the timing but have a better understanding now. This will be my last year of DB contribution. I have maxed out lookback so I can only put in 40k this year, maybe less if my income > £150k which it could be. I think I am bumping around the limit (thanks to Brexit and overseas shares) but will stop worrying.

aldershot

It does make me think that if i get a calculation from the DB administrator and I have indeed got my calc correct, I can correctly forecast the value at age 62. If I deduct this from the current LA, it gives me a target for the DC side. If that is at say 620k and I am magically at that number when i'm 55 next October, i should crystallise the DC at that point and assume any negative legislation would leave me protected if the LA reduced further before 62 and the second crystallisation event?

MoneyLover_2

You should get a current pension quote from the administrator. Receiving the higher of RPI and 5% p.a. is not normal for a DB pension scheme - the vast majority increase pensions in line with inflation capped at 5% p.a. A majority also switched the index used for increasing pensions from RPI to CPI in 2009 and so it is possible (although it will depend on your scheme's rules) that you pension will have been increased in line with RPI inflation between 2000 and 2009 and CPI inflation since then.

If you do receive inflationary increases capped at 5% your revalued pension will probably be more like £8,800 at the moment and a lot less than you have projected at retirement (unless inflation seriously takes off).

hyubh

MoneyLover wrote: »

Receiving the higher of RPI and 5% p.a. is not normal for a DB pension scheme - the vast majority increase pensions in line with inflation capped at 5% p.a.

'Vast majority' is an exaggeration. Inflation up to 5% is the statutory minimum for pension on service between 1997 and 2005. That said, and at the risk of being pedantic, the OP was referring to revaluation rather than pension increases (OK, similar statutory minimums, but not identical...)

A majority also switched the index used for increasing pensions from RPI to CPI in 2009

It was in 2011 (announced in 2010, so the first CPI not RPI Sept-Sept figure used was 2010). I'm not sure it's true that the 'majority' switched - I'm assuming you're only talking about private sector DB, otherwise your pension increases claim would make much sense...?

MoneyLover_2

hyubh wrote: »

'Vast majority' is an exaggeration. Inflation up to 5% is the statutory minimum for pension on service between 1997 and 2005. That said, and at the risk of being pedantic, the OP was referring to revaluation rather than pension increases (OK, similar statutory minimums, but not identical...)

Yes, I was using pension increases in the place of revaluation to avoid jargon. The vast majority don't necessarily provide statutory pension increases in payment but the majority do provide statutory pension increases before retirement (i.e. statutory pension revaluation).

Of those that don't they tend to provide fixed revaluation rather than RPI revaluation subject to a minimum. I work in DB pensions and have never seen a scheme that does this, although I have only come across a few hundred of the 6,000 or so DB schemes so there may be some that do (but not many). I certainly think it is sensible for the OP to check this (hence why I raised it) as his expectations may be on the high side.

hyubh wrote: »

It was in 2011 (announced in 2010, so the first CPI not RPI Sept-Sept figure used was 2010). I'm not sure it's true that the 'majority' switched - I'm assuming you're only talking about private sector DB, otherwise your pension increases claim would make much sense...?

Yes, it was from 2011. The 2011 revaluation order was based on CPI inflation over the year to September 2010, so CPI inflation from September 2009 to September 2010. As I suggested, without going into way too much detail, you therefore get RPI inflation up to September 2009 and CPI inflation from September 2009 (if you receive statutory revaluation).

aldershot

I, and a few of my ex colleagues, are well aware of the unusually generous terms of the scheme. Its not a large scheme, with just a few hundred deferred members (it closed and moved to DC in 2005 or so I believe) and we are watching the funding of the liability closely too. That said, it is time to get a current valuation!

hyubh

MoneyLover wrote: »

Yes, I was using pension increases in the place of revaluation to avoid jargon.

But the OP was specifically talking about revaluation...

the majority do provide statutory pension increases before retirement (i.e. statutory pension revaluation).

The majority do not revalue pre-97 excess for early leavers then...?

Of those that don't they tend to provide fixed revaluation rather than RPI revaluation subject to a minimum.

I'm not claiming a 'majority' provide underpins, and certainly not denying your general advice for the OP to double check with the administrator. But your sweeping generalisations are a little... sweeping.

I work in DB pensions

Well, yeah, ditto...

As I suggested, without going into way too much detail, you therefore get RPI inflation up to September 2009 and CPI inflation from September 2009 (if you receive statutory revaluation).

Erm, no, you're a year out.

Anyhow, I imagine our little to-ing and fro-ing isn't helping the original poster one iota!

MoneyLover_2

hyubh wrote: »

But the OP was specifically talking about revaluation...

He was, but I don't see the word revaluation in his post. I was also talking about revaluation and decided to refer to it as pension increases for ease of understanding.

hyubh wrote: »

The majority do not revalue pre-97 excess for early leavers then...?

The majority do as it is a statutory requirement (except for some pre 86 benefits for leavers back in the day)

hyubh wrote: »

I'm not claiming a 'majority' provide underpins, and certainly not denying your general advice for the OP to double check with the administrator. But your sweeping generalisations are a little... sweeping.

I said the OP would receive increases in line with his scheme rules, I was just indicating what typically happens. It sounds like maybe the OP does get generous revaluation, but it is certainly worth double checking.

hyubh wrote: »

Erm, no, you're a year out.

I'm not.

hyubh wrote: »

Anyhow, I imagine our little to-ing and fro-ing isn't helping the original poster one iota!

Agreed

aldershot

OP here!

My original question was around how the LA crystallisation test for a mixed DB and DC pot worked and now I understand that.

I am pretty confident I have the uprating of my DB pot correct but will check the documentation again and ask the administrator for a valuation.