UKAEA pension, lump sums and retirement date

ProDave

This may sound a bit of an odd question, but I am trying to "optimise" the date I draw this pension.

If I do nothing, I will start to receive it in early March 2023.

My concern revolves around the increase in pension due to inflation and timing the start of my withdrawal specifically with the lump sum in mind.

The scheme rules seem to say the annual rise will be determined by the CPI at the end of September each year.  This year that is likely to be about 10%?

The only other thing I have found is "The level of increase is usually made known in March and applied in April."

Now it does not matter for the ongoing pension payment when the rise is applied, but my brain is telling me I don't want to start drawing this pension until this rise has been applied.  So if I deferred payment until say 1st May I would be certain the lump sum would be in the order of 10% higher vs starting to draw the pension in March, before the rise has been applied.

Thoughts please?

kipsterno1

Is the lump sum effected by the annual increase? If this is a final salary scheme then isn't the lump sum based on the final salary?  

ProDave

The scheme rules say 

"Subject to the other provisions of the Rules, the following benefits are payable to a member

who on or after reaching pension age retires:

i) an annual pension of one-eightieth of the member’s pensionable final earnings

multiplied by the length of the member’s reckonable service; and

ii) a lump sum of three-eightieths of the member’s pensionable final earnings multiplied

by the length of the member’s reckonable service;"

So the same calculation, i.e. members pensionable final earnings and reckonable service are used to calculate the pension and the lump sum.

Now it is many years since I left that employment, but each year my  entitlement has increased in line with inflation, so one must assume my "pensionable final earnings" has been increased each year.

If that assumption is true, then waiting until after the end of April will ensure a likely 10% increase in the lump sum.

I will dig deeper into the scheme rules to find the actual working of increases for deferred members.

NoMore

Do you need the money in march, if not I don't see any harm in waiting and seeing.

Dazed_and_C0nfused

If that assumption is true, then waiting until after the end of April will ensure a likely 10% increase in the lump sum

I understand your logic but what do you expect to happen to the two months pension you chose not to take for March and April.  Is that just lost for ever?

ProDave

Dazed_and_C0nfused said:

If that assumption is true, then waiting until after the end of April will ensure a likely 10% increase in the lump sum

I understand your logic but what do you expect to happen to the two months pension you chose not to take for March and April.  Is that just lost for ever?

My understanding is, if you defer the pension, it gets recalculated, so the annual amount you receive would go up slightly on the assumption you will be drawing it for a shorter period of time.  Something in the order of 4% each year you defer it, so if I defered it for 2 months, if that is applied pro rata, then the pension would increase by 0.666%

But in any event, my estimation is 10% extra lump sum is more that 2 months of pension, so still worth doing.

Secret2ndAccount

If you're not already confused enough you might also want to take a look at
https://forums.moneysavingexpert.com/discussion/5962314/rules-on-using-occupational-pensions-revaluation-orders/p1
Taking your pension before/after your anniversary of leaving includes/excludes 1 extra year in the inflation calculation which can result in a higher or lower starting value for part of your pension. 

[Deleted User]

Interesting. Exactly 1 year behind you. Hope it works. Let us know the outcome. 

MX5huggy

Maybe you should go now:- 

What is Pension Increase (PI) and when will it be applied?

Pension Increase is the annual increase applied to your pension. The increase has been calculated and applied in line with your Scheme Rules and statutory requirements. The increase for April 2022 is 3.1%. Any pension which had been in payment for less than a year is increased by a proportionate amount depending on when the pension started during 2021/22

You’ll get 8/12ths of Aprils CPI increase on your pension forever compared with whatever paltry pay rise is eventually agreed for this year. 

ProDave

Just to put some numbers to this, assuming CPI is 10% in September (it has already reached 9% so a reasonable assumption) then my lump sum would increase by £2229 by defering drawing the pension until May to ensure the increase is applied in April.

The monthly gross pension would be £766 so even if I completely "lost" March and Aprils payment I would still be £697 better off.

There is also a slight tax benefit in the extra lump sum is tax free and the "lost" pension payments would have been taxable.

ProDave

MX5huggy said:

Maybe you should go now:- 

What is Pension Increase (PI) and when will it be applied?

Pension Increase is the annual increase applied to your pension. The increase has been calculated and applied in line with your Scheme Rules and statutory requirements. The increase for April 2022 is 3.1%. Any pension which had been in payment for less than a year is increased by a proportionate amount depending on when the pension started during 2021/22

You’ll get 8/12ths of Aprils CPI increase on your pension forever compared with whatever paltry pay rise is eventually agreed for this year. 

Is that from the UKAEA scheme rules or somewhere else?