DB Pension final calculations

nikal

I'm in the midst of taking a DB employer pension and over the years I've received regular updates on the projections which have always been positive the last being in November 2020. I appreciate they are all only estimates but the final projection I've just received has dropped 3.32% since November this I'm told is because the Nov estimate was subject to the revaluation factors for the 2021 calendar year and the calculation in November was on an estimate for CPI of 1.917%  the actual CPI just released by the Government  being 1.1149% hence the drop in the CPI by 0.8% results in a 3.32% drop in the whole pension yearly income figure.
I have called and asked for an explanation which I may receive however I'm told it's very complicated and I was wondering if anyone can advise how these calculations are carried out as some some projections have evidently been reduced by 7%?
I assumed that each year the pension is readjusted to the new figures so that all is required when you finally take the pension is the adjustment for the last year so in my view the adjustment would be very small as only the increase since last year would be adjusted and in this case the increase was approx 40% high 1.917% against 1.149% actual but that would only apply to the increase? A small number.
If on the other hand for all I know the complete pension sum is revalued every year however is a 3.31% reduction correct  but notwithstanding that point why is this the only reduction in all the years?

AlanP_2

Is this a deferred DB pension as opposed to one you are still a member of / contributing to?

nikal

Sorry yes it's a deferred scheme.

hyubh

nikal said:

I'm in the midst of taking a DB employer pension and over the years I've received regular updates on the projections which have always been positive the last being in November 2020. I appreciate they are all only estimates but the final projection I've just received has dropped 3.32% since November

Was the prospective date of retirement exactly the same between the November and January projections...?

nikal

Yes exactly the same date on both projections.

caveman8006

This is a little-known (but crucial) wrinkle in the indexation formula of all DB deferred pensions that means that if the deferred pension is brought into payment at an earlier date in the year than the anniversary of leaving the scheme, then the inflation rate from the year of leaving the scheme is dropped from the cumulative indexation calculation. Anyone leaving a scheme in a high inflation year (eg 1988, 1989 or 1990) can lose out by five-figure sums if they (or their financial advisors) don't make sure they put their deferred pensions into payment at a date in the calendar year after the anniversary of their leaving the job. It almost cost me £30,000 and might well have impacted many thousands of other pensioners.

 

https://forums.moneysavingexpert.com/discussion/5962314/rules-on-using-occupational-pensions-revaluation-orders

nikal

Many thanks for the help so I've looked up the inflation figures for as I left in 2003:-
2001-4.5%       2002-1.67%     2003-2.89%
The  projected payment commencement date of my pension is in mid February 2021 and I left at month end 2003 so payment will commence before the anniversary of my leaving the company. I will lose out on the 2.89%?

caveman8006

It is a little complicated - the inflation rates used are the yoy% changes in the RPI to each Sep I think (or though that might be changing to CPI) and you will get the current yoy rate instead of the historic one, so it is only the difference you lose. Normally, when inflation is close to 2% as in recent years, this saw-tooth is hardly noticeable, but if one end is an outlier (either higher or lower) then excluding it in the months up to the anniversary of leaving employment can make a big (negative or positive) difference. There may be other factors involved as well, but this is the first place I would look. One way of checking is asking for a retirement quote for a date just after the anniversary to see if it jumps back to the previous level

nikal

It's taken some time to sort this out and my pension will start just after the anniversary date of me leaving the company(and hence not paying in any more) as there is an increase albeit not massive but over time I am comfortable I will recoup the initial loss.

TVAS

Caveman I don't get this can you explain please. I left in July 1994. My claim date will be February. So when would be the best month to put my pension put into payment.

caveman8006

As 1994 was a fairly average inflation year (2.2%) it won't make a huge difference if you go before or after the anniversary of your departure, but worth getting a quote for 1 August as well as, one in Feb/Mar and see how they compare