Formula to calculate DB early retirement

Al_S

Are there any FAs/ pension experts who could advise on this please?


I am 64 with 9 months until my normal retirement age.


I have a DB scheme who wrote to me in November (when I had just over a year to NRA) with pension options. It gave the option to transfer out, take then (NOV 17) or take then (NOV 17) with PIE.


The reason they have offered these options is they say because they are changing from RPI to CPI for increases on excess pension - from March.


If I waited till 65, I am always going to take the Tax free lump sum. So to take it ( Nov 17) the PIE offer seems quite impressive.


However I noticed that my anniversary of leaving date was early this month and I know that the excess part is revalued each year. The Pension Advisory service says that usually schemes do the revaluation on the anniversary of leaving date.


My question is if I ask for an illustration to retire now - research I've done with The Pension Advisory Service and common sense tells me that the PIE pension would be higher because of the extra years revaluation and also because I'm a few months nearer retirement.


BUT- with little knowledge of the inner workings of pensions, I'm sure that the formula/calculations to arrive at the early retirement PIE offer will be far more complex than that.


Is there any part of the formula that is dynamic/variable enough that rejecting this offer (effectively retiring last Nov) and asking to retire now would actually turn out to be a lower PIE pension?


I have asked this in general terms, if anyone thinks they can shed any light I will happily post all the figures too.


Regards


Al

kidmugsy

What's PIE?

hyubh

kidmugsy wrote: »

What's PIE?

Pensions Increase Exchange - as the name implies, the scheme offers a one-off boost to the pension in favour of no future above-statutory pension increases. PIE exercises are somewhat common in recent years amongst private sector DB schemes.

hyubh

Al_S wrote: »

I have a DB scheme who wrote to me in November (when I had just over a year to NRA) with pension options. It gave the option to transfer out, take then (NOV 17) or take then (NOV 17) with PIE.

Surely there's a fourth option - kindly refuse their offers to derisk their own liability, and instead take the regular pension, with regular pension increases, at NPA? More generally, you seem to be quite keen on the PIE option, but without expressing a view on the actual 'PIE' aspect...?

kidmugsy

Al_S wrote: »

If I waited till 65, I am always going to take the Tax free lump sum.

Why is that?

Al_S

The projected figures at 65 mean than taking the lump sum option would take well over 20 years to accumulate in excess pension hence lump sum preference. The PIE option would take much longer.


So PIE looks favourable to me.


Was just wondering if there were any financial advisors/pension experts who could advise on the elements the scheme actuary might use in the formula as per my original post?


Thanks

zagfles

Al_S wrote: »

Are there any FAs/ pension experts who could advise on this please?


I am 64 with 9 months until my normal retirement age.


I have a DB scheme who wrote to me in November (when I had just over a year to NRA) with pension options. It gave the option to transfer out, take then (NOV 17) or take then (NOV 17) with PIE.


The reason they have offered these options is they say because they are changing from RPI to CPI for increases on excess pension - from March.

So are they saying they're going switch to CPI for revaluation for the entire period since you left till you take the pension (ie a backdated change)?? Or just from March this year?

If I waited till 65, I am always going to take the Tax free lump sum. So to take it ( Nov 17) the PIE offer seems quite impressive.


However I noticed that my anniversary of leaving date was early this month and I know that the excess part is revalued each year. The Pension Advisory service says that usually schemes do the revaluation on the anniversary of leaving date.

Yes, statutory requirements, revaluation is based on number of complete years, so you see a jump in your pension on every anniversary of your leaving date. You also see a change at the turn of the calendar year, since a different set of inflation figures are used. This could be up or down.

The GMP is revalued differently - based on tax years.

My question is if I ask for an illustration to retire now - research I've done with The Pension Advisory Service and common sense tells me that the PIE pension would be higher because of the extra years revaluation and also because I'm a few months nearer retirement.


BUT- with little knowledge of the inner workings of pensions, I'm sure that the formula/calculations to arrive at the early retirement PIE offer will be far more complex than that.


Is there any part of the formula that is dynamic/variable enough that rejecting this offer (effectively retiring last Nov) and asking to retire now would actually turn out to be a lower PIE pension?


I have asked this in general terms, if anyone thinks they can shed any light I will happily post all the figures too.


Regards


Al

PIE will be based on standard pension, so when the standard pension increases (eg due another years' indexation) then the PIE pension should increase also.

But PIE is usually in the scheme's favour. They probably tell you this. It's usually worked out to reduce the scheme's liabilities, ie overall it'll save the scheme money if people take the PIE option.

Al_S

Thanks for your reply. Yes from march all increases will be based on CPI. And pie offers will be based on CPI too so I know after March the PIE offer will be less.

So the excess will have increased due to revaluation on 5 Feb and there will be a reduction for taking 9 month's before NRA. Are there any reasons you can think that might make the offer now (compared to three months ago) less for example I wondered if they use the present value in their formula? Which could be different to what was used then ?

zagfles

Can't see why it would be less. In Jan it might have been but not once you're passed the anniversary date. Unless inflation is negative, which it isn't.

I'd get a quote asap, if they're really going to backdate revaluation to CPI to when you left it could be a big cut if you left a long time ago (though I'm surprised they can do this).

kidmugsy

Al_S wrote: »

The projected figures at 65 mean than taking the lump sum option would take well over 20 years to accumulate in excess pension

That's assuming zero inflation, presumably?

kidmugsy

zagfles wrote: »

(though I'm surprised they can do this).

It depends on the scheme's rules. One of my DB pensions was cut back from RPI to CPI because the scheme was already heavily in deficit and the rules allowed the change.