Effect of Rate Rises on DB Early Retirement Reductions

bonnyrigger

Any thoughts on whether the recent rate rise, high inflation and the "mini-budget" fun and games will have any effect on the reduction rates that DB schemes (e.g. LGPS) use for early taking of benefits?
My LGPS pension has a 22.2 % reduction if I take it 5 years early (62), not sure if I will or not, but if the reduction is going to go up then keeping it untouched until 67 becomes more attractive.

Cheers

Dazed_and_C0nfused

bonnyrigger said:

Any thoughts on whether the recent rate rise, high inflation and the "mini-budget" fun and games will have any effect on the reduction rates that DB schemes (e.g. LGPS) use for early taking of benefits?
My LGPS pension has a 22.2 % reduction if I take it 5 years early (62), not sure if I will or not, but if the reduction is going to go up then keeping it untouched until 67 becomes more attractive.

Cheers

You might get some info here,

https://www.gov.uk/government/publications/local-government-pension-scheme-review-of-the-actuarial-valuations-of-funds-as-at-31-march-2019

leosayer

I'm am interested in this because my wife is in the LGPS and will also be looking to take it early, once she has exhausted other pension savings.

What is stopping you from taking it early?

Nebulous2

bonnyrigger said:

Any thoughts on whether the recent rate rise, high inflation and the "mini-budget" fun and games will have any effect on the reduction rates that DB schemes (e.g. LGPS) use for early taking of benefits?
My LGPS pension has a 22.2 % reduction if I take it 5 years early (62), not sure if I will or not, but if the reduction is going to go up then keeping it untouched until 67 becomes more attractive.

Cheers

They work it out annually I believe, on the basis of the actuarial deduction being neutral. Recent press reports of excess deaths may well be more significant than the interest rate rises for the calculation. 

How long have you been in the LGPS pension? You will find that the different sections have different rules and the reductions will vary if you have been a member for a long time. 

I took mine at 59 and took the hit. In many ways it was a psychological decision as much as a financial one. I'd been a wage slave for 40 years and liked the comfort blanket of a regular monthly payment to replace my salary, instead of living off savings. 

hugheskevi

Actuarial reduction factors in public service pension schemes are based on the SCAPE discount rate, the level of which is based on expected long-term GDP growth, using the Office for Budget Responsibility’s (OBR’s) projections of long-term real average GDP growth.

Given all the recent developments, it would not be surprising to see the SCAPE rate reduced, in line with lower expectations of long-term real average GDP growth.

A lower discount rate would mean the value of annual pension is higher, especially later in retirement (as it is discounted by a lower factor), and hence a lower reduction is required to be actuarially neutral. Thus it may be reasonable to hope that the reduction for early retirement is reduced when rates are reviewed in future (and correspondingly, the cost of Added Pension and other voluntary benefits increased).

Note that there is an ongoing consultation about the SCAPE discount rate methodology.

michaels

hugheskevi said:

Actuarial reduction factors in public service pension schemes are based on the SCAPE discount rate, the level of which is based on expected long-term GDP growth, using the Office for Budget Responsibility’s (OBR’s) projections of long-term real average GDP growth.

Given all the recent developments, it would not be surprising to see the SCAPE rate reduced, in line with lower expectations of long-term real average GDP growth.

A lower discount rate would mean the value of annual pension is higher, especially later in retirement (as it is discounted by a lower factor), and hence a lower reduction is required to be actuarially neutral. Thus it may be reasonable to hope that the reduction for early retirement is reduced when rates are reviewed in future (and correspondingly, the cost of Added Pension and other voluntary benefits increased).

Note that there is an ongoing consultation about the SCAPE discount rate methodology.

Helpful.

I intend to take as early as possible as that then allows me to lock in a 100% spousal benefit but that is still 3 years away so lower deduction sounds good, change in methodology sounds like a risk....