Defined Benefit Cash Balance vs defined contribution pension

Kynthia

Cottage_Economy wrote: »

Dasherman (and any one else who might know) - have you ever come across a clause in the Royal Mail pension stating that if the surviving spouse is more than 10 years younger than the RM employee will not be entitled to the normal proportion of the benefits if their spouse dies?

I read it in a pension document from Royal Mail many years ago but have never been able to find it again anywhere and the document has since been thrown out. The newer documents over the last 5 years or so do not have this clause in them, but I know I saw it. I didn't imagine it.

I remember thinking at the time that I might be stuffed as I'm 12 years younger, but now I'm not sure whether that was relating to a death in service benefit or the actual pension.

This is common in DB pensions. There's something similar in the civil service pension scheme. Can you contact the pension administrator to find out exactly what percentage of the pension you would get being 12 years younger?

Cottage_Economy

Kynthia wrote: »

This is common in DB pensions. There's something similar in the civil service pension scheme. Can you contact the pension administrator to find out exactly what percentage of the pension you would get being 12 years younger?

We can try but we've never found the pension administrators very helpful when we've had other queries. Queries just seem to disappear into the ether and are never answered.

DairyQueen

Dear OP and dasherman (and anyone else who knows the foggiest about RM Pensions),

I am hoping that you will pick-up on this post despite the age of the thread. I posted a separate thread on this subject yesterday and then spotted this thread during my general internet search this morning.

On Sunday my brother handed me an envelope that contains some bumf (dated Feb 2018) about the RM pension changes due to be put into effect in April. He has until 19th March to decide which pension arrangement to choose.

I know something about the current/historic schemes (inc the DB scheme that closed in 2008) as I undertook research for him at the beginning of last year. However, I knew zilch about the current proposals until last night.

My bro is (own admission) an appalling money manager so this latest 'throw it at sis and hope for the best at the last minute' thing is typical. I am no pension expert but have an interest in pensions and investments so am a bit better-informed than most (completely disinterested) people I know. This is the only place where I can find people that are interested/well-informed/both to discuss or seek advice.

I have received a valuable suggestion that bro should contact the Pensions Advisory Service but I know that 'inertia' is his middle name on all issues financial and he won't do so. Past experience suggests that left to his own devices he will simply follow the path of least resistance.

I have read through the Feb 2018 pension bumf. It is so badly written and confusing that, despite my interest in investments, I am struggling to understand the dog's dinner they have concocted and to apply it to my bro's situation.

As my bro has ignored the issue until the last minute the most important thing is to make a decision now on whether he should stay with what appears to be the transitional default (the DB cash balance scheme - DBDB) or to switch to the DC scheme, and then look at the detail later. There is so little info included in this pack that it's impossible to determine exactly what his benefits under the DBCB will be. I suspect that he received a personal illustration at some point (probably equally confusing) and that was immediately thrown in the bin.

I have now undertaken some web research and have discovered a bit more about both the DBCB and the proposed collective defined contribution scheme (CDC) that it's hoped will replace it and the DC at some point (when legislation allows). Given my bro's situation it seems a no-brainer that he should opt for the DBCB.

Basic info about bro:

Age 61 this year.
Current member of RMPP (DB scheme).
In receipt of 'Age 60' benefits and also has 'Age 65' benefits accrued under the DB scheme.
Divorced but two dependent children (ages 12 and 10).
Will continue working until age 67 (when his youngest is 18).
SPA = 66.
Terrible (Oscar winner) money manager. He works hard but will not be able to resist blowing every penny of any cash that he can get his mitts on. Income tax will not deter him if the sum is large (and any sum with more than three zeros will be seen in that category).

My bro will be at serious risk of penury in old age if his pension is a pot rather than income. It is therefore essential that as much of his pension as possible is income-based.

Am I right in believing that the DBCB is miles away the best option for him? As this is the default he doesn't need to do anything? Your opinions would be most welcome.

dasherman

Which section of the RMPP is he in? Section B or C?

Section B gets a lump sum as standard, but you can commute some or all of it to get a bigger pension. Section C doesn't get a lump sum as standard, but you can commute some pension to get one. More info on the Royal mail pensions website:https://www.royalmailpensionplan.co.uk/ look in the library section for more in depth info.

The DBCBS provides a guaranteed lump sum at retirement(NRA of 65) with the addition of possible annual bonuses and is a 'new section' of the RMPP. Most posties are in section C and choose to take the maximum 25% lump sum. The aim is that the DBCBS will provide a lump sum so they don't have to give up as much or possibly any pension to get a similar tax free amount. Meaning their annual pension is effectively bigger.

The DC alternative is just like any other DC pension and is not connected to his existing RMPP in any way.

I would say that the DBCBS would be the best way to go for most members of the RMPP and particularly those in section C. And as that is the default option, he doesn't need to do anything to join.
I'm in section C and will be doing just that!

Royal Mail and the CWU have come up with a Collective Defined Contribution scheme going forward. But as the legislation isn't currently in place to introduce it yet, the DBCBS and DC are transitional arrangements until that happens. I think the plan is to then transfer everyone with the relevant critera(1 years service) into the CDC scheme.

CDC aims to provide similar benefits to a DB scheme(lump sum and pension), but there are no guarantees, so the income you get from it in retirement won't necessarily increase with inflation as you'd expect from a DB scheme. That's assuming the legislation is forthcoming!

I hope that helps and I agree about the poorly written bumf, most people in my sorting office haven't really got a clue what it all means! Although with all the various sections and changes that have been made to the scheme over the last 10 years, it's little wonder why it's difficult to understand.

DairyQueen

Thank you dasherman; you're a star!

Your info helps a lot. Bro is Section C and I am now reassured that I have correctly suggested that he takes no action and defaults into the DBCB.