Pension increase exchange advice

enthusiasticsaver

Has anyone received a pension increase exchange offer before and would anyone confirm that I am right to advise my husband not to accept this offer from his pension scheme where he takes a bigger pension now in exchange for annual inflation increases?

My husband is 59 and his DB pension which is our main source of income is £24696 and the scheme are offering to increase this to £29065 but no further annual increases. We have other pensions, savings and investments and are not struggling. I have suggested my husband refuse this as he still could have possibly up to 30 years of retirement ahead, he is in good health and giving up 39 years of increases for an extra £4369 per year or 17.7% of his pension seems a poor deal. He is a tax payer so once the tax is paid that will be 20% lower. We survive comfortably on our pensions at the moment with the occasional dip into savings/investments and will have a further £17.5k a year when our state pensions pay out in 2024 and 2026 although part of my husbands pension reduces as he took a levelling pension which reduces when his state pension pays out.

I also have my LGPS and a further GMP from Barclays in 2020 to pay out to me.

What would others do and is there anything I haven't considered? The scheme administrators admit that accepting this would mean a 30% saving to the scheme on the cost of DHs increases each year suggesting this is not a good deal for us especially as we are not struggling to live within our pension income.

Dazed_and_confused

Why do 30 years of retirement involve 39 increases?

Is the immediate increase to £29,065 permanent?

Are you absolutely certain of State Pension values? Plenty on here have misunderstood their State Pension forecast due to the misleading way it is presented online.

enthusiasticsaver

Sorry mistype. 30 years increases. Yes his pension would increase permanently to £29065 and stay like that presumably until his state pension kicks in and they remove the £3400 levelling pension he opted for when he retired. So it would then be £25465 for his life time. I would get 50% if he died.

Dazed_and_confused

So it's not permanent increase to £29,065 then.

Shame, if it had been then it would have been more attractive.

As it is it seems to be an extra £3,495/year after tax (or probably less if you live in Scotland).

Have you looked back at his pension increases over recent years to get an idea of how long it will take to reach the £29,065 under normal circumstances?

Dox

enthusiasticsaver wrote: »

The scheme administrators admit that accepting this would mean a 30% saving to the scheme on the cost of DHs increases each year suggesting this is not a good deal for us especially as we are not struggling to live within our pension income.

Your use of the word 'admit' suggests you think it is some sort of swindle. It isn't - nor is the saving to the scheme 30%; that is simply a guesstimate based on various projections. If a member accepts the offer and dies within a few years, and the spouse also dies a lot earlier than expected, the scheme 'loses out' quite considerably.

Your husband could take the increase and use the extra money now to invest in a personal pension. He'd get tax relief on that and could take 25% tax free, plus he'd be building up a pot of money on which to draw in the future.

Should he? It really is a personal decision. There's no magic formula and no 'one size fits all' answers.

AnotherJoe

Another POV is that you will need the additional money much less when older than now.
So you could make better use of that extra money for the first few years while younger and in good health, whilst aged say 80 plus at which point though the financial balance has swapped over to the inflation increase being better,you won't be spending that money anyway.
You said you survive comfortably now, so will you really need that extra money in 30 years time when you've got SP on top as well ?
So, my vote is take the extra now and spend it on something that makes good memories and you can enjoy now rather than worry about losing out slightly in 30 years time.

hyubh

enthusiasticsaver wrote: »

What would others do and is there anything I haven't considered? The scheme administrators admit that accepting this would mean a 30% saving to the scheme on the cost of DHs increases each year suggesting this is not a good deal for us especially as we are not struggling to live within our pension income.

Unlike the others, I broadly agree with your assessment (PIE is a 'derisking' strategy, and is indeed usually intended to be a money saver overall as well). That said, what increases exactly does he get? Not the amounts, but the rates (CPI capped to 3%, fixed 3%, etc.)...?

enthusiasticsaver

Dazed_and_confused wrote: »

So it's not permanent increase to £29,065 then.

Shame, if it had been then it would have been more attractive.

As it is it seems to be an extra £3,495/year after tax (or probably less if you live in Scotland).

Have you looked back at his pension increases over recent years to get an idea of how long it will take to reach the £29,065 under normal circumstances?

His pension increases are linked to inflation. He has only been retired 18 months but 2016/2017 was 4.1%. 2017/2018 was 5%. I cannot see this as being a more attractive option than the one he has at the moment where his pension keeps up with inflation.

brewerdave

As per post #7 - if the pension in payment currently increases by RPI , a return to moderate inflation levels of 3-4% could see that one off increase vanish before he even reaches SP age!

enthusiasticsaver

Dox wrote: »

Your use of the word 'admit' suggests you think it is some sort of swindle. It isn't - nor is the saving to the scheme 30%; that is simply a guesstimate based on various projections. If a member accepts the offer and dies within a few years, and the spouse also dies a lot earlier than expected, the scheme 'loses out' quite considerably.

Your husband could take the increase and use the extra money now to invest in a personal pension. He'd get tax relief on that and could take 25% tax free, plus he'd be building up a pot of money on which to draw in the future.

Should he? It really is a personal decision. There's no magic formula and no 'one size fits all' answers.

The forecast he received said based on their estimates the pension increase represents 70% of the value of future increases he would be giving up. He still has a significant DC pension which we are not yet drawing on but will have to before his state pension kicks in as he will be moving close to higher tax rate territory then with an increased DB pension, state pension plus any drawings on his DC pension. Of course as he is retired he can only put £2880 in each year anyway. I am not sure building up future pension benefits for him is the right way to go.

We are focusing on my SIPP as at the moment I pay no tax and have transferred 10% of my allowance to him until 2020 when I will need it back again. We also invest in stocks and shares isas for both of us although we haven't used this years allowance yet as we have expensive home improvements to do which we are using our cash savings for.

enthusiasticsaver

brewerdave wrote: »

As per post #7 - if the pension in payment currently increases by RPI , a return to moderate inflation levels of 3-4% could see that one off increase vanish before he even reaches SP age!

Exactly!! That is my thinking too.