How do you work out the real value of a DB pension?

Durban

How do you work out the real value of a DB pension?

I currently pay into the LGPS pension and its current value is around £6000 per year and when I retire will is projected to be around £15000 per year.

This is valued at 20 times the annual pension by the LGPS which gives the total that it will be worth when I retire of £300,000.
This seems low to me and I would have thought that an index linked pension of around £15,000 per year plus survivor pension would be worth more than this.

How can you work out the real value of the pension?

Prism

If you were to attempt to pay yourself an income of 15000 from a DC pension pot, using the standard (but unreliable) 4% drawdown rate you would need a pot of £375,000. Its hard to say what the value of the guarantee of the DB pension is worth over the unreliable nature of the DC option. Other differences like your ability to leave a DC pension to your children make accurate comparisons difficult

HappyHarry

It's only valued at 20x the income for the purpose of testing it against the Lifetime Allowance.


To purchase an annuity on the same basis would cost far, far more

Durban

HappyHarry wrote: »

It's only valued at 20x the income for the purpose of testing it against the Lifetime Allowance.


To purchase an annuity on the same basis would cost far, far more

Yes, that is what I thought but was interested to find out what I would have to save in order to get those same benefits

AnotherJoe

Find a website that gives quotes on annuities and keep adjusting the amount you'd purchase for until you get to £15k a year plus survivor benefits.
I will guess £600k.

Thrugelmir

Durban wrote: »

How do you work out the real value of a DB pension?

I currently pay into the LGPS pension and its current value is around £6000 per year and when I retire will is projected to be around £15000 per year.

This is valued at 20 times the annual pension by the LGPS which gives the total that it will be worth when I retire of £300,000.
This seems low to me and I would have thought that an index linked pension of around £15,000 per year plus survivor pension would be worth more than this.

What's the £15k based on. Does this factor in future inflationary increases?

Pension_Geek

Thrugelmir wrote: »

What's the £15k based on. Does this factor in future inflationary increases?

And if so, that will significantly increase the cost of an annuity.

The Money Advice service has a calculator for annuities OP. Make your date of birth so its as if you are retiring now.

HappyHarry

The "real value" of the LGPS pension is £15,000 per year.

I'm not entirely sure what you mean by "real value". Do you mean "how much would it cost to purchase an identical annuity on the open market"?

If so, you would probably need to speak to an adviser and give them the following information;

1. Your normal retirement age for the LGPS

2. What percentage, if any, of the LGPS would be paid to your spouse (if applicable) in the event of your death

3. Your spouse's age when you were at your normal retirement age for the LGPS (if applicable)

4. Inflation protection post-retirement on the LGPS scheme

5. What guarantee period, if any, your LGPS scheme has

6. Details of your health at normal retirement age for the LGPS

I other words, the best you will get will be a very rough estimate.

Durban

Thank you for the replies.

I’m just curious as to what would need to be saved if I was working in the private sector for the equivalent benefits.
I know how good it is but a lot of the colleagues that I work with have no idea.

Silvertabby

HappyHarry wrote: »

The "real value" of the LGPS pension is £15,000 per year.

I'm not entirely sure what you mean by "real value". Do you mean "how much would it cost to purchase an identical annuity on the open market"?

If so, you would probably need to speak to an adviser and give them the following information;

1. Your normal retirement age for the LGPS

Same as State pension age, but any Rule of 85 protections (probably only in respect of pre 2008 service) would reduce the actuarial reduction for early payment.

2. What percentage, if any, of the LGPS would be paid to your spouse (if applicable) in the event of your death

As of now, average of 40%. However, reductions for early payment and/or commutation are ignored so spouse's pension (again, as of now) could be as much as 60%.

3. Your spouse's age when you were at your normal retirement age for the LGPS (if applicable)

Doesn't matter with the LGPS.

4. Inflation protection post-retirement on the LGPS scheme

CPI (uncapped).

5. What guarantee period, if any, your LGPS scheme has

For someone who left employment after April 2008 (even if they didn't start to draw the pension immediately) there's a 10 year guarantee period in addition to any survivor's pension due. ie, 10 x annual pension minus pension actually paid.

6. Details of your health at normal retirement age for the LGPS

Not relevant.

I other words, the best you will get will be a very rough estimate.

................

HappyHarry

Silvertabby, as shown many times before, you know your stuff with regards to LGPSs.

But, I was talking about how much an annuity that provided the same benefits as the LGPS might cost to purchase. At which point, the age of spouse, and the health of the individual are relevant questions to be asking, and the cost of such an annuity will vary depending upon the responses.