Pension increase exchange advice

mgdavid

enthusiasticsaver wrote: »

........

Soo confused.

keep it simple.
They aren't making the offer because you asked for it.
They aren't making it because they've found a pot of gold which they want to give to pensioners.
They aren't doing it out of the goodness of their heart.


They are doing it because overall they reckon it will save them money which otherwise would go to pensioners.


Therefore in your position I would decline.

Marcon

enthusiasticsaver wrote: »

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.

Although schemes hope to save money, one of the other reasons for a PIE is to give more certainty in terms of funding needed for the scheme. Your husband has the use of the money sooner and if put to good use, hemay be no worse off in the long run - it's not the case that if the scheme 'saves' 30% he 'loses' 30%.


These decisions are always more complicated than you think (or hope!).

kidmugsy

AnotherJoe wrote: »

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.

How can you be confident that their losses will be slight?

jamesd

enthusiasticsaver wrote: »

One thing it does say though that it is only the first tranche which is actually only £8778 which is exchangeable so around a third of the pension and the other two thirds will continue to attract increases each year. The £8778 will increase to £13147 and remain there for life if he takes the PIE option but the remaining £15918 will continue to attract the normal increases each year.. That may alter things slightly although the key issues document still suggests in our circumstances we would be better declining it.

What can greatly affect the benefit of a PIE deal is life expectancy. If it's substantially lower than the scheme average a PIE deal can be a good one. If it's normal, PIE is less likely to be good but spending tends to decline as we get older so taking PIE on part of the money can be a handy way to allow for that.

Use caution with any analysis that considers neither individual ife expectancy nor spending changes over time and the greater value of money when young.

In your specific case you expect that the higher income would replace drawing on other money that would remain invested, improving the case for PIE. The age-related spending decreases tend to be higher at higher incomes, also implying a better case than usual for PIE. I suspect that taking the PIE is the best choice for your situation.

If you want the choice that is likely to lead to least future what if worrying, don't take the PIE. The easier life. Frankly, this future strife potential reduction may be worth more to you than the pure financials.

There are alternatives to PIE to vary income, like variable drawdown.

Rodders53

I had a PIE offer with a fairly detailed pack from my pension scheme and they paid for IFA advice over the 'phone to me (and my wife as she gets a good widows pension).

Only part (around 41%) of my pension (pre 1998 service?) was PIE-able and that was an 'in the hand' uplift of over 44% of the sum concerned - yours seems to be more at a 49% increase?.
I did a spreadsheet to work out what/when my overall income started to be lower with PIE vs without and also a 'running total' of the payments to me (and my wife). Using an estimate / average RPI figure (bit of a gamble but what else can you do?)...

For me it was 74/5 when the pensions matched and 85 before I lost out 'total money paid to me'. These approximated to what the info pack provided suggested.

We had also just inherited a considerable sum and were house-hunting to be closer to family. We concluded we should have the PIE offer and aim to spend the money now and be confident we'd still have enough income / assets to spend as we got older.

So the IFA advice was to PIE in our case.

I was also one of the few who took 'levelling' when I retired early... Figuring that extra cash in the hand was more useful today than tomorrow. Just means that much of my state pension is recovered by my pension scheme paying me less for the first 10 years after 65, but my total income is more or less the same. (Until I hit 75 then I get a boost).

If the pension scheme aren't paying for independent financial advice for pensioners maybe it will be worth talking to someone to confirm one way or another?

enthusiasticsaver

jamesd wrote: »

What can greatly affect the benefit of a PIE deal is life expectancy. If it's substantially lower than the scheme average a PIE deal can be a good one. If it's normal, PIE is less likely to be good but spending tends to decline as we get older so taking PIE on part of the money can be a handy way to allow for that.

Use caution with any analysis that considers neither individual ife expectancy nor spending changes over time and the greater value of money when young.

In your specific case you expect that the higher income would replace drawing on other money that would remain invested, improving the case for PIE. The age-related spending decreases tend to be higher at higher incomes, also implying a better case than usual for PIE. I suspect that taking the PIE is the best choice for your situation.

If you want the choice that is likely to lead to least future what if worrying, don't take the PIE. The easier life. Frankly, this future strife potential reduction may be worth more to you than the pure financials.

There are alternatives to PIE to vary income, like variable drawdown.

There is a graph on my husbands personal illustration to say at 2% RPI inflation the crossover point will be 81, at 3.5% it will be 73 and at 5% it will be 70. He is in good health and both his parents lived until late eighties so there is every expectation he will live past all the predicted crossover points.

You are correct that if we take the higher pie option our other savings and investments will remain invested as there will be little or no need to dip into them.

Having modelled our income streams even with the lower pension we won't be worrying. Our state pensions plus a probable inheritance at some point in addition to the one remaining DB pension still to pay out, a DC pension for DH, a SIPP for me and around £340k of investments and cash indicates we should be comfortable with either option. I am now leaning towards taking it especially as only 40% of the pension is exchangeable so 60% of the pension will still attract inflation increases.

enthusiasticsaver

Rodders53 wrote: »

I had a PIE offer with a fairly detailed pack from my pension scheme and they paid for IFA advice over the 'phone to me (and my wife as she gets a good widows pension).

Only part (around 41%) of my pension (pre 1998 service?) was PIE-able and that was an 'in the hand' uplift of over 44% of the sum concerned - yours seems to be more at a 49% increase?.
I did a spreadsheet to work out what/when my overall income started to be lower with PIE vs without and also a 'running total' of the payments to me (and my wife). Using an estimate / average RPI figure (bit of a gamble but what else can you do?)...

For me it was 74/5 when the pensions matched and 85 before I lost out 'total money paid to me'. These approximated to what the info pack provided suggested.

We had also just inherited a considerable sum and were house-hunting to be closer to family. We concluded we should have the PIE offer and aim to spend the money now and be confident we'd still have enough income / assets to spend as we got older.

So the IFA advice was to PIE in our case.

I was also one of the few who took 'levelling' when I retired early... Figuring that extra cash in the hand was more useful today than tomorrow. Just means that much of my state pension is recovered by my pension scheme paying me less for the first 10 years after 65, but my total income is more or less the same. (Until I hit 75 then I get a boost).

If the pension scheme aren't paying for independent financial advice for pensioners maybe it will be worth talking to someone to confirm one way or another?

That is useful to know and yes we have the option of free IFA advice over the phone which we will take up. This is paid for by my husbands ex employer.

We also took the levelling pension option for the same reason as you and my husbands pension will be lower by this amount when his state pension pays out. We figured having more money in the early years would avoid us drawing on investments/savings and we have not touched them since DH retired almost 2 years ago.

I think the percentage of my DHs pension which is PIE able is roughly the same as you. The pre 1997 pension is the only bit which can be exchanged and that is £8778 out of a total pension of £24696. However once the levelling pension is taken out of the equation it amounts to £8778 PIE able and £12,260 non PIE able. That amounts to just under 42%. Up until the levelling pension goes the percentage is 36%. The gain per annum is £4369 and he would still be a lower rate tax payer.

Reluctantpensioner

Lets play with some numbers for you. I first looked up some annuity rates:
http://www.thisismoney.co.uk/money/pensions/article-1583882/Best-annuity-rates.html
Here are two entries that are near yours:

Escalation: RPI, Joint Life, 50% spouse. (Yours pension fund may be better or worse)
Male 60, Female 60
Canada Life 1 £3,286 (per £100,000)
So, if you had a pension fund of £751,552 (100000*24696/3286) you could equal your current pension by buying an annuity from Canada Life.

The new deal is more like this:
Escalation: Level, Joint Life, 50% spouse.
Male 60, Female 60
AEGON Scottish Equitable 1 £6,015
To buy this today you would need: £483208 (100000*29065/6015)

I will leave it to you to evaluate the offer.
You might want to get more accurate numbers than my quick look based on a few guesses.
I expect the relative values to be present whatever.

PS: not recommending annuities here: but they are a good window into what it might be costing the pension fund to provide these two pensions.

Audaxer

enthusiasticsaver wrote: »

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?

I considered it on a DB pension, but I didn't like the fact that most of my pension wouldn't increase each year. It may also mean that the surviving partner would only get 50% of the increased pension with no further increases or limited further increases.

I also think pension schemes offer it as incentive as it benefits them, as on the whole people are living longer. So unless you really need the higher pension early I would go for the normal pension. If you do want more pension money upfront, you could even consider a reduced pension with a lump sum if there is an option to take a lump sum at a good commutation rate.

enthusiasticsaver

For those of you interested we had the discussion with the Retirement Advisor engaged by my husbands pension scheme and she went through our financial needs and in the meantime I had modelled our income over the next 10 years with the PIE offer accepted and again with the PIE offer rejected. We would get to the crossover point when my husband reached the age of 73 and be worse off if he lived to 83 so it was a toss up and the retirement advisor agreed.

In the end we leant towards accepting the offer and the Retirement advisor agreed and also recommended accept so his pension will increase to £29065 in November 2018. Our rationale for accepting this was.

Our most expensive retirement years are now. We are doing lots of home improvements to future proof our home as we intend staying here. That means new kitchens and bathrooms as they are 20 years old now, redecorating and new carpets, making the garden easy maintenance in about 5 years time when the grandkids are a bit older. We also run two cars now but eventually will go down to 1. We are doing lots more holidays and paying for some family holidays to enjoy time spent with our daughters and families and young grandchildren. We are actively engaged in our local country club which are high subs, we are out lots meaning meals out, fuel spent etc etc. Consequently although my husbands very good pension and my smaller pension of around £5500 is a fairly decent income we are drawing on our cash reserves to the tune of around £5-£10k per year. Obviously this will decrease as the home improvements finish and we move to maintenance only. If we took the PIE offer we may well be able to live without drawing on our cash reserves so much.


Only around 35% of my husbands pension is subject to the offer so 65% of the pension will still attract annual increases.


We still have my second pension which pays out in 2020 and our state pensions which pay out in 2024 and 2026. We have a significant investment buffer of around £250k and our cash reserves are now £80k. They were £85k at the beginning of the year and they will drop to around £65k by the end of the year when the new kitchen will be paid for. We also have around £50k in other pensions which are not being drawn on at present.


We considered the effect on me should my husband predecease me but given I would have my two pensions, half my husbands pension as a widows pension and my state pension plus significant savings and investments as around 75% of the investments and cash savings are in my name as I was a basic rate tax payer and my husband higher rate one I am sure I would be ok with that level of income. Plus I definitely would not want to stay in a fairly large 4 bed house if just me so would downsize.


All in all then we thought given our income will be more than sufficient once we receive the extra £17k state pensions plus my extra GMP in 2020 and the other investments/savings we have that we will not really miss the increases on 35% of my husbands pension so have sent the accepted offer back. Thanks all for advice and whilst some advised reject and that was my first thought we mulled it over, did some calculations and talked a lot about the implications I think we have made the right decision for us. There were no tax implications either way as husband will still be a basic rate tax payer.