High Inflation v Early DB Commencement reductions.

westv

I bet there are more than a few people who are above the minimum age for their DB pension (A)  but below the normal retirement age for it (A) who are tapping out numbers on spreadsheets now. More especially those who think their pay rises between A and B won't amount to much.
I was just thinking about it for me wife. She has banked years in Classic which commences in 7 years but we don't expect her rises in that time to be anywhere close to inflation. Pensions in payment though increase at CPI so any early commencement reduction gets eaten away.

Lindlou

Almost the same as me. My Classic starts in 18 months. Its certainly something I'm thinking about 

Thrugelmir

westv said:

She has banked years in Classic which commences in 7 years but we don't expect her rises in that time to be anywhere close to inflation. 

Every year she remains working the more pension is accrued though and the lower the early retirement factor.  Make a sizable difference to the final pension drawn.  Remember inflation is a personal matter. Where people spend their money differs. 

diddyflanker

Most public sector DB schemes get inflation (CPI) increases on amounts accrued before they go into payment so the reduction isn't affected. However, I suspect rather than know as I haven't done the number crunching, that delaying taking the pension before their NPA until after April 10th when such inflation is added might be beneficial because, at the moment, monthly increases are based on last September which was 3.1%...waiting until April they will be based on this coming September and are likely to be in double digits. That plus the lower actuarial reduction for waiting a few more months of you can manage it.

facade

Is there an element of revaluation of the final salary based on inflation in previous years?

My Teachers pension used the average of my best 3 years salary in the last 10, revalued for inflation.

Our Masters had never given inflation meeting pay rises, but my salary from 10 years before had 10 years of inflation applied to it, so the final salary they used was considerably more than my actual final salary. In fact, not letting the "best (5 & 6%)" inflation numbers drop off at the start was a factor in my early retirement. (I gained more from inflation 10 years before than I would gain from another 18 months service.)

hugheskevi

westv said:

I bet there are more than a few people who are above the minimum age for their DB pension (A)  but below the normal retirement age for it (A) who are tapping out numbers on spreadsheets now. More especially those who think their pay rises between A and B won't amount to much.
I was just thinking about it for me wife. She has banked years in Classic which commences in 7 years but we don't expect her rises in that time to be anywhere close to inflation. Pensions in payment though increase at CPI so any early commencement reduction gets eaten away.

No need to take it early unless desired, she could just switch to the Partnership pension scheme, leave the classic pension deferred and it would get CPI increases.

Thrugelmir said:

Every year she remains working the more pension is accrued though and the lower the early retirement factor.  Make a sizable difference to the final pension drawn.  Remember inflation is a personal matter. Where people spend their money differs. 

For those with long service in classic expecting a pay increase below inflation and no expectation of significant future salary escalation (ie promotion), the difference is surprising.

For example, Assume a member with 30 years of service earning £30,000 in the classic scheme. If they get a 2% pay award and inflation is 8%, their pension would be £11,475 p/a classic plus £752 of alpha pension if they stay in the main DB scheme, or £12,150 if they switch to Partnership they save member contributions (contribute 3% rather than 5.45%), get a bigger automatic lump sum and build up a DC pot of £6,225.

Of course, in future years the equation may change and unless staying out of the DB scheme for 5 years the classic pension would be relinked to final salary if they opted back in, defeating the purpose of leaving in the first place, so there is an element of guessing about the future.

Most public sector DB schemes get inflation (CPI) increases on amounts accrued before they go into payment so the reduction isn't affected.

Most of the older versions don't.

Is there an element of revaluation of the final salary based on inflation in previous years?

Not in the older versions, such as classic. Look-back only applies over a 3 year period, and only if pensionable earnings have actually dropped (so a pay freeze wouldn't be enough, pay must actually go down).

westv

hugheskevi said:

No need to take it early unless desired, she could just switch to the Partnership pension scheme, leave the classic pension deferred and it would get CPI increases.

The classic pension is already deferred - switched to alpha in 2015. Whenever it's taken it's based on final salary so there are no CPI increases beyond what the salary gets until then.

hugheskevi

westv said:

hugheskevi said:

No need to take it early unless desired, she could just switch to the Partnership pension scheme, leave the classic pension deferred and it would get CPI increases.

The classic pension is already deferred - switched to alpha in 2015. Whenever it's taken it's based on final salary so there are no CPI increases beyond what the salary gets until then.

If a member is active in alpha, they are also active in classic, so they are an active classic member, not deferred. This is even though they are not accruing further service in classic.

Switching to Partnership means leaving alpha, and by extension leaving classic. The classic pension is calculated based on the salary at date of switching to Partnership, and the classic pension then increases by CPI.