Do I transfer my deferred pension in my current pension?

Izzy_Skint_2

Hello all,

Hopefully I can narrow down the generic nature of the title!

I was in a non-contributory pension from 1990-1997 which is currently growing at the rate of RPI. It is currently worth just over £2000.00 p.a.

My current scheme is contributory, and two thirds of final salary after 30 years. I have been in this scheme since 2001. It is in the public sector.

Of course, when I got a transfer quote my current employers quoted me in terms of years and days instead of monetary amounts. Seven years of non-contributory service equated to just over a years worth of transferrable pension service with my current provider.

This I was not surprised at and can understand the reasons why.

The real crux here is, I understand that I can only take up to a max two thirds pension when I retire in 24 years time. Now, my current wage is £30,000 p.a. and therefore my deferred pension currently runs at around 15% of my current annual wage.

Therefore, if I were to transfer it now I would be getting a considerably smaller percentage (i.e. just over a years transferrable service) than if I were to keep it where it is at the moment, growing at RPI.

Am I missing something here but on this basis would it be advisable to keep my deferred pension where it is, and maybe I can retire after say, 27, 28 years where I am and still achieve two thirds pension rather than transfer it now for just over a years transferrable service (i.e. 29 ish years to achieve two thirds).

My current pension runs at 1/60th per year for the first twenty years, and then at 2/60ths for the last ten.

Thanks for reading this, any help would be greatly appreciated.

Thank You

Graham Morris

Ian_W

Hi Graham,

My current pension runs at 1/60th per year for the first twenty years, and then at 2/60ths for the last ten.

Only 2 occupations I know of with that type of fast accrual.

Is that why do you think you will get more for the transfer down the line? Or is it the fact that the preserved pension is linked to RPI?

I'm no expert and pension rules change fairly regularly but I'd be quite surprised if there was an advantage either way TBH.

MrChips

Izzy_Skint wrote: »

It is currently worth just over £2000.00 p.a.

Now, my current wage is £30,000 p.a. and therefore my deferred pension currently runs at around 15% of my current annual wage.

I make that about 7%!

You haven't given enough information to give many specific pointers, but I guess what you need to consider is the following.

You say by transferring your deferred pension into your current scheme, you will be given a (approx) 1 year service credit. If this is a 60ths scheme, you will therefore get 1/60 of your final salary at retirement. Based on current salary this is worth £500 p.a. but will increase at the same rate as your salary. Your deferred pension is now about £2000 p.a. but increasing at rpi.

Therefore your salary would have to increase in future at a rate far in excess of price inflation to catch up.

You also need to consider the respective Normal Retirement Ages and pension increases in payment which may skew the above analysis.

The relative security of the two schemes should also be considered. The Public Sector pension should be secure, your deferred pension could be cut back to PPF levels if the scheme wound up in the future.

The only industry I know with such a set up is the police force - which doesn't seem to be awarding above inflation pay rises at the moment!

Ian_W

MrChips wrote: »

The only industry I know with such a set up is the police force - which doesn't seem to be awarding above inflation pay rises at the moment!

The Fire Brigade have a very similar, if not identical, 30yr scheme but the comment about pay rises "at the moment" are probably true of both. However, without having the figures to prove it, I think if you'd taken a bet 30yrs ago on RPI v Average earnings, the latter would have won by a mile.

IIRC it was Mrs Thatcher in the 80's who removed the link between state pensions and earnings instead linking to RPI and since then pensioners groups have campaigned to have it restored [something GB has reluctantly agreed to, I think by 2012]. However, none of us has a crystal ball so either way is a gamble. However linking to your current final salary scheme will also have the benefit of linking to increased pay because of any promotions in the future.

Another thing to consider is whether your defered scheme would allow early payment if you were required to retire from your current occupation? Both require relatively high standards of health and fitness and both pay an immediate service related but enhanced pension if you are forced to retire early through ill-health or injury[further enhanced if as a result of a duty related injury]. Those provisions alone may explain why transfering seems relatively expensive but if you ever need them I would think they're very beneficial.

HTH.

CLAPTON

firstly take today vaues

option 1 is staying as you are so your projected pension will be
2,000
plus 30,000 x ((20)/60+10x2/60))= 20,000
total in todays values of 22,000

option 2 .. buying 1 year
30,000 X (21/60 + 10x2/60) = 20,500

so buying extra year seems like bad news

But taking into consideration inflation and 'real' increasing in your salary over the next 24 years.

In general 'real' salaries tend to grow about 2-2.5% above inflation (excluding actual promotion) so in 25 years your 'real' salary will be increased by say 50%

so your figures will look like this
option 1A
2,000 (in todays values still)
plus (30,000 *1.5 (20/60 + 10x2/60) = 30,000
total of 32,000

option 2A

=45,000 (21/60 +10x2/60) = 30,750 in real terms


other factors to consider

a. if you expect to get promoted then your real salary will increaseby more
this will make the option of the additional year more attractive.

b. currently the government is thinking of changing the pension rules so deferred pensions can be linked to to a minimum of 2.5% rather than 5.0% (or inflation if less).
again this will make the option of the additional year more attractive.

MrChips

CLAPTON wrote: »

other factors to consider

a. if you expect to get promoted then your real salary will increaseby more
this will make the option of the additional year more attractive.

b. currently the government is thinking of changing the pension rules so deferred pensions can be linked to to a minimum of 2.5% rather than 5.0% (or inflation if less).
again this will make the option of the additional year more attractive.

Even if factor "b" came in, it would only apply to future service so wouldn't affect the transfer in (assuming the transfer value actually arrived before the change was affected). If it came in later, presumably your transfer would buy a little bit more than one year as it would be less valuable with lower guaranteed increases in deferment.

Izzy_Skint_2

Hello there, sorry for the delay in replying and thank you for your replies.

Mr Chips - "The only industry I know with such a set up is the police force - which doesn't seem to be awarding above inflation pay rises at the moment!"

Very deductive Mr Chips, do you want to become a Detective Constable like me?

I think you've helped me make my mind up that I will transfer into the Police Pension Scheme. I will (hopefully) be promoted at sometime during my service, and given the fact that my current deferred pension quotes at age 60, when I hope to retire at the latest 57, and, my deferred pension administrators cannot quote me how much the three year drop would be, that a good ballpark would be to transfer (and after all, that's what I'm really after here, a good ballpark decision.)

***That is, I will transfer unless there is something I have said or missed there in my brief summing up that someone may want to comment upon!***

An element of my transfer value is GMP, am I correct in saying that the government have to pay a minimum amount of interest per annum on this GMP element up until my retirement date, and then in payment thereafter?

I actually do understand why the Home Office could only offer us 2.5% pay increase this year, it's just the knife-twisting element of only offering it from 1st December that sticks in me!

Merry Christmas to you all!

(except Jacqui Smith)

Graham