Suddenly finding CETV Multiplier Tempting

Notepad_Phil

Dazed_and_C0nfused said:

Albermarle said:

For context, im 52. DB is worth 7100 at 60

Is this definitely an up to date figure ? and not the figure you were given when you left that company ?

I only ask as many posters make this mistake and do not realise that between when they left the employer, and today, that the pension will have almost certainly increased with inflation and in this case the multiplier looks less exciting.

Good point. 

How can they know what it will be worth in 8 years? 

Or does it have a permanent fixed inflation increase?

If it's like my DB pension then they would make an educated guess on coming inflation by looking at past inflation and use that. And depending on the age of the pension there may be some fixed rates used on any GMP that is included in the pension.

jamesd

numptydumpty18 said:

I have a deferred DB pension which pays out at 60. This years statement shows a CETV multiplier of 44 ... For context, im 52. DB is worth 7100 at 60, I intend retiring soon, partly due to ill health, and have about 600k in other pensions and an ISA as well as full state pension entitlement. Spouse has good DBs kicking in at 60 and 67 and will also have full SP, she will be continuing working part time till 60.

At what point does a CETV multiplier become worth considering?

Is that multiplier based on the income at 60 or the income if taken now? I suspect 60 so it's really higher than you're thinking.

You potentially are in one of the situations where transferring out might not be best: ill health. If it's of a nature and degree which would let you take full DB early then that could be a good deal.

Beyond that, don't look at the multiplier, look at the income, when it's available and how inflation protection, spousal benefits and inheritance potential differ.

Safe withdrawal rate theory cones up with reliable income rules so you use them to get the income alternative. There are many rules that you can use, here are two popular ones.

A. 3.0% of capital increasing with uncapped inflation each year for a roughly 40 year plan, called 4% rule or formally, constant inflation-adjusted income. This is based on the worst case in the last 125 or so years and increases are usually possible.

B. 5.0% of capital initially on a 40 year plan that usually has inflation increases but will skip them or use extra cuts or increases depending on the times you actually live through. This starts closer to average expected results, exploiting the flexibility of income to allow it. Guyton-Klinger rules.

Assuming a CETV of  £312,400 those two income possibilities from age 55, with no growth until then, would be £9,372 or £15,620. With 100% spousal pension and ususlly substantial inheritance.

You can handle longevity risk via state pension deferral. Assuming £9,500 state pension each year of deferring costs £9,500 and adds £551 a year of income that has uncapped inflation protection using CPI. If the two of you were to defer on this basis then you'd each defer for 6.4 years to get a combined matching £7,100 income for life. It'd cost you £121,600 of your pot.

Marcon

Dazed_and_C0nfused said:

Albermarle said:

For context, im 52. DB is worth 7100 at 60

Is this definitely an up to date figure ? and not the figure you were given when you left that company ?

I only ask as many posters make this mistake and do not realise that between when they left the employer, and today, that the pension will have almost certainly increased with inflation and in this case the multiplier looks less exciting.

Good point. 

How can they know what it will be worth in 8 years? 

Or does it have a permanent fixed inflation increase?

There are only 3 possible scenarios where it is possible to predict what a deferred DB pension will be worth in 8 years:

• where the member left the scheme so long ago that there is no increase in deferment (extremely rare - we're talking about leaving a scheme over 30 years ago AND with no GMP element)
• where the whole pension is GMP with fixed rate revaluation
• where the pension has a fixed rate revaluation which is at least as good as the statutory minimum.

Thrugelmir

Personally my old DB schemes and state pension are the fixed interest elements of my pension planning. The DC is primarily equity based. Holding equities alone will result in an extremely bumpy ride over the decades in retirement. Bonds are currently very expensive to purchase, therefore makes no sense to liquidate and either reinvest back into them or purchase an annuity at a later date. 

When looking at current equity valuations. Gut instinct says there'll be a period of underperformance. 

naedanger

What increases will your pension get each year both before you get to 60 and once in payment?

Also would there be any medical underwriting on taking a cetv? If not, and you are in serious ill-health, and your DB pension does not offer any ill-health benefits - such as drawing your pension early without reduction, then it may be that taking a cetv would be a good idea.

Tony4625

numptydumpty18 said:

shortseller09 said:

What is the date of the latest CETV?

Long-term gilt yields have doubled since January, as a consequence transfer values have fallen significantly since.

Good point. I got the pension statement yesterday and hadnt looked at the dates. The CETV was October last year, so well out of date, that may make it easier for me to revert to type and keep the DB. Also shows the pension value as of March last year and not this year so its a year out of date as well, which seems odd for an up to date statement.

  What other factors determine a CETV value apart from age , proximity to be able to access funds ( at 55)  dependents age , annuity costs , considering other scheme members etc etc etc . The formula for working it out must be endless ?😯

Marcon

Tony4625 said:

numptydumpty18 said:

shortseller09 said:

What is the date of the latest CETV?

Long-term gilt yields have doubled since January, as a consequence transfer values have fallen significantly since.

Good point. I got the pension statement yesterday and hadnt looked at the dates. The CETV was October last year, so well out of date, that may make it easier for me to revert to type and keep the DB. Also shows the pension value as of March last year and not this year so its a year out of date as well, which seems odd for an up to date statement.

  What other factors determine a CETV value apart from age , proximity to be able to access funds ( at 55)  dependents age , annuity costs , considering other scheme members etc etc etc . The formula for working it out must be endless ?😯

The scheme's investment strategy. A CETV is based on the cost to the scheme in question, so a scheme which has a heavily defensive portfolio will assume a much lower rate of potential return (higher CETV) than one with a high proportion of growth assets (lower CETV).

Thrugelmir

Marcon said:

Tony4625 said:

numptydumpty18 said:

shortseller09 said:

What is the date of the latest CETV?

Long-term gilt yields have doubled since January, as a consequence transfer values have fallen significantly since.

Good point. I got the pension statement yesterday and hadnt looked at the dates. The CETV was October last year, so well out of date, that may make it easier for me to revert to type and keep the DB. Also shows the pension value as of March last year and not this year so its a year out of date as well, which seems odd for an up to date statement.

  What other factors determine a CETV value apart from age , proximity to be able to access funds ( at 55)  dependents age , annuity costs , considering other scheme members etc etc etc . The formula for working it out must be endless ?😯

The scheme's investment strategy. A CETV is based on the cost to the scheme in question, so a scheme which has a heavily defensive portfolio will assume a much lower rate of potential return (higher CETV) than one with a high proportion of growth assets (lower CETV).

Due to their nature. Pension scheme investments err on the side of prudence.  Growth is far too often bandied around without any context.  There's no certainty of higher returns if anything there's a greater risk of sizable losses in terms of holding individual stocks. 

Marcon

Thrugelmir said:

Marcon said:

Tony4625 said:

numptydumpty18 said:

shortseller09 said:

What is the date of the latest CETV?

Long-term gilt yields have doubled since January, as a consequence transfer values have fallen significantly since.

Good point. I got the pension statement yesterday and hadnt looked at the dates. The CETV was October last year, so well out of date, that may make it easier for me to revert to type and keep the DB. Also shows the pension value as of March last year and not this year so its a year out of date as well, which seems odd for an up to date statement.

  What other factors determine a CETV value apart from age , proximity to be able to access funds ( at 55)  dependents age , annuity costs , considering other scheme members etc etc etc . The formula for working it out must be endless ?😯

The scheme's investment strategy. A CETV is based on the cost to the scheme in question, so a scheme which has a heavily defensive portfolio will assume a much lower rate of potential return (higher CETV) than one with a high proportion of growth assets (lower CETV).

Due to their nature. Pension scheme investments err on the side of prudence.  Growth is far too often bandied around without any context.  There's no certainty of higher returns if anything there's a greater risk of sizable losses in terms of holding individual stocks. 

I think you're confusing two things: the basis for calculating a CETV and what happens if the scheme's portfolio does not perform as well as hoped.

The investment strategy plays a part in the calculation of a CETV - something novices often struggle to grasp, but - somewhat more worryingly - so do quite a few financial directors!

The fluctuations in fund value are taken into account at the triennial valuation, not when calculating a CETV. If the growth strategy hasn't performed as well as expected, you can expect to see that reflected in a bigger deficit, with the employer on the hook for heftier deficit recovery plan contributions. Setting the valuation (not the transfer) assumptions is where prudence comes in to the picture.

TVAS

People who transfer before the minimum pension age are simply transferring the risk and cost from the scheme to themselves.

If you are in ill health you may be able to claim an ill health pension. If you are in serious ill health (doctor predicts you will not survive 12 months) trustee would pay you a capital sum tax free but it must be spent in full. 

You have not given me a reason why you want to transfer other than the CETV is high. It is high for a reason because that is the fund required to provide you with £7,100 at 60, plus escalation in payment plus a spouse pension of half or two thirds.

If you think your life expectancy is shorter than normal and you would rather a lump sum to be outside of your estate for your spouse or other beneficiaries via a drawdown plan. This would be a reasonable argument. 

You then have to find an IFA willing to transfer. What would support the rationale above is medical evidence from your GP.