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Yearly reduction factor

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Eros1000Eros1000 Forumite
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I have just recently taken early retirement as a result of voluntary redundancy.
I have a company final salary pension scheme which is due to start on !st October 2019.
If I wish I can take it a year early but this would mean a reduction of 7%
From what Ive read a 3 to 4% reduction seems to be more the norm.

Is 7% reasonable or is there just a wide variance between different pension providers?


thanks
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Replies

  • TrickyDicky101TrickyDicky101 Forumite
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    Does it matter whether or not it's reasonable? You either take it and accept the reduction or you don't. Reasonableness doesn't come into it.

    I would not take a 7% reduction on those terms.
  • kidmugsykidmugsy Forumite
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    Good God, 7% less per annum for the rest of your life? It would be far cheaper just to borrow to see you through the year. Bung it on the mortgage.
    Free the dunston one next time too.
  • AnotherJoeAnotherJoe Forumite
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    I wouldn't take 3 or 4% let alone 7%. At least it's an easy decision, you don't take it until it's due and fund the next year from other sources. Hopefully you have other savings that can come Into play ?
  • jamesperrettjamesperrett Forumite
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    Eros1000 wrote: »
    From what Ive read a 3 to 4% reduction seems to be more the norm.

    A 3-4% reduction per year you retire before NRA is the norm if you are retiring 8-10 years before NRA but, for the Civil Service Scheme at least, the annual reduction increases the nearer you are to NRA. 7% is still high though.
  • MarconMarcon Forumite
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    Eros1000 wrote: »
    I have just recently taken early retirement as a result of voluntary redundancy.
    I have a company final salary pension scheme which is due to start on !st October 2019.
    If I wish I can take it a year early but this would mean a reduction of 7%
    From what Ive read a 3 to 4% reduction seems to be more the norm.

    Is 7% reasonable or is there just a wide variance between different pension providers?

    Pension 'providers' don't offer final salary schemes; trustees do (in the private sector - public sector schemes have managers if they are unfunded). Yes, there is a variance between individual schemes, but 7% looks unusually high. Is the scheme heavily in deficit?

    I'd check with the trustees (or their third party administrators) if that really is the figure and, if the answer is yes, ask when the next review of factors is due.
  • edited 9 July 2018 at 10:14AM
    BrynsamBrynsam Forumite
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    edited 9 July 2018 at 10:14AM
    Does it matter whether or not it's reasonable? You either take it and accept the reduction or you don't. Reasonableness doesn't come into it.

    Actually reasonableness does come into it.

    OP, who is the scheme actuary/which firm do they work for? The Summary Funding Statement you receive each year will tell you, or ask the pension scheme administrators.
  • marlotmarlot Forumite
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    AnotherJoe wrote: »
    I wouldn't take 3 or 4% let alone 7%....
    Why not? It comes to about the same amount.

    Let's say the pension is £10k a year, and the person might be in retirement for 25 years from NRA.
    Taking it at NRA gives £10k x 25 = £250k.

    With a 4% reduction, £9600 x 26 years gives £249600. A 3% reduction x 26 years = £252,200.

    If the OP is no longer working, but the pension takes him into 20% or 40% tax, there are also some modest tax savings.

    But back to the OPs 7% - that seems too high.
  • BrynsamBrynsam Forumite
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    A 3-4% reduction per year you retire before NRA is the norm if you are retiring 8-10 years before NRA but, for the Civil Service Scheme at least, the annual reduction increases the nearer you are to NRA. 7% is still high though.

    The reverse is generally true in private sector schemes. The further away you are from retirement, the harder it is to predict 'the future' - so the annual reduction factor often increases if you are more than 5 years away from the scheme's retirement age.
  • DoxDox Forumite
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    A 3-4% reduction per year you retire before NRA is the norm if you are retiring 8-10 years before NRA but, for the Civil Service Scheme at least, the annual reduction increases the nearer you are to NRA. 7% is still high though.

    I've just looked at the Alpha retirement factors and that doesn't seem to hold true.
  • jamesdjamesd Forumite
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    Eros1000 wrote: »
    If I wish I can take it a year early but this would mean a reduction of 7%
    That's the highest reduction rate I remember seeing.

    It's not necessarily unreasonable because it's related to the life expectancy of the total membership at the normal pension age. If that's say ten years, getting it one year early adds a lot to the costs and implies a bigger reduction than for a scheme where it's 25 years.

    But you aren't the average and you can know how your life expectancy looks. If it's only a few years, transferring out is likely to be best. If it's longer than average, waiting is likely to be best. There may be a point where taking the 7% drop for life looks like a good move but before accepting that you should compare it to the income you could get by transferring and buying an enhanced annuity.

    An office worker in a scheme with mainly manual workers is likely to find that 7% is ridiculously bad for them but it might not be horrible for a more typical member.

    7% is a huge reduction and you shouldn't just take that unless you have no other way to live or find that you can't get a better outcome by transferring. Borrowing on 30% credit cards is dirt cheap compared to a 7% cut for life.
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