Actuarially Reduced pension

MargaretG

Might sound like a silly question, but what does an actuarially reduced pension mean and is it worth considering at all? I mentioned in my previous post that I am considering taking partial retirement at age 51. I am currently in the Classic Scheme with the civil service and my employers have come back with some offers that are not very generous.. My Gross Pension is £7 000 per annum, actuarially reduced to £4,000, pittance really. I have been offered a lump sum but my pension is reduced by £1 a year for each £12 of lump sum I take. It is obvious that my pension pot is nothing to write home about so I am thinking why not take my maximum lump sum and go invest in a pot that might yield slightly better returns.? Or should I just settle for my meagre pension and defer the lump sum till later, perhaps age 55?

sandsy

It means it's adjusted to allow for the fact that:
a) the assets which are notionally allocated to pay for your pension will not be invested long enough for the full £7000 to be payable at normal retirement age, and
b) the pension which can be afforded from the earlier retirement age will have to be paid for a longer period than if you'd held off claiming it until normal retirement age.

Flugelhorn

Presumably you can leave your pension where it is until the normal retirement age? would get more money then

atush

I would work for a few more years, packing a Sipp to the gills to provide retirement income at 55 so you can take your DB pension later either unreduced, or reduced to a lesser degree

Obvs would have been better to be thinking about this in your 40s instead, but there you go.

To me, Actuarial reduction is something to be avoided.

hyubh

MargaretG wrote: »

Might sound like a silly question, but what does an actuarially reduced pension mean

Put simply, if a pension adjustment is made on 'actuarial' terms, it is intended to be cost neutral to the scheme, relative to how the actuary assesses the cost of keeping the pension promise. In contrast, your commutation rate (12/1) is not on actuarial terms because it values the pension differently (in this case much lower) than that.

I am thinking why not take my maximum lump sum and go invest in a pot that might yield slightly better returns?

See bigadaj's answer in the other thread. What sort of investment are you thinking of, remembering the pension given up would be indexed to CPI, and is government guaranteed...?

Or should I just settle for my meagre pension and defer the lump sum till later, perhaps age 55?

You won't be able to take the pension and defer the lump sum when both relate to the same pensionable service.

enthusiasticsaver

If your employer offers flexible working you may be able carry on working and draw your pension.

The actuarial adjustment is to reflect the fact that the pension will be paid for a longer period over the additional years between your age now and your normal retirement date.

If it is reduced by almost half (as in your case) then it is worth considering deferring it. I am looking at that myself but as I am 57 the actuarial adjustment on mine is much less than yours. Ideally you would have other investments to bridge the gap if the reduction is too much. The commutation rate is very poor in civil service and my LGPS so I wont be taking the TFLS as my pension will take me below the tax threshold anyway.

MargaretG

So in effect, presumably leave my job now if I am fed up (which I am) , leave my pension as it is and then re visit early or full retirement age 55 and hope for a better package then!

poorchester

Are you sure you are still in Classic? If you are 51 you would be in Alpha by now.
If you are/were in Classic you would get a lump some without giving up any pension.

BobQ

Margaret,

As has been said, Classic pension is paid on the basis it is drawn at aged 60. Any early payment of the pension you have earned to date comes at a price due to the additional costs of drawing it early. The normal lump sum has to be taken at the same time as you draw the rest of the pension and is defined as three times your pension income. So commutation reduces your pension even more for an additional lump sum. You could sacrifice the normal lump sum to give more pension income (reverse commutation).

What would you do if you retired at 51? Can you afford to live without drawing your pension? If so the benefit of leaving the pension to 60 is that it will increase in value to match CPI (both the pension income and the lump sum). That will perhaps be more that your pay will rise in that period? (You will have to make that call).

Partial retirement works just the same. You could reduce your hours (with your employers agreement) say to 3 days a week and draw the equivalent of 2 days salary as pension. In the short term your income would remain the same, but the pension you draw would still be actuarially reduced.

Of course if you have a reasonable expectation of getting a non-civil service job that pays the same as your civil service salary it might make sense. But when you make that call remember that the pension probably adds about 15-20% to your salary.

I think a lot of people are fed up at work these days (the impact of austerity) but that is not a good reason for giving up a job with an indexed linked pension at age 51 unless you can afford to do so or have another job to go to.

A far better option if you can afford to do so is to save into a private pension like a SIPP and accumulate enough money to make up the difference between your full pension at 60 and an actuarially reduced one in the future.

Also remember your state pension will be increasing now that you are no longer contracted out but you will still not be able to draw it for15-16 years.

BobQ

poorchester wrote: »

Are you sure you are still in Classic? If you are 51 you would be in Alpha by now.
If you are/were in Classic you would get a lump some without giving up any pension.

Good point

http://www.civilservicepensionscheme.org.uk/media/95310/aagg-classic_v3_300315.pdf

mgdavid

Hope this doesn't sound harsh - it isn't meant to.
Many people are fed up with their job but stick at it.
Many people are grateful that they have a job at all.
Most people work until 65 or 66.
I think you have some hard decisions to make, which could affect your financial well-being for the expected remaining 30+ years of your life.