Final Salary Pension

Bramhopewarrior

Just curious to peoples perceptions of these? Ive an old one from an old job and its just sat there. Should I leave it alone? How do they work? Listened to my dad when I was young and paid in for 10 years.

xylophone

Do you have a scheme guide? This should outline how a deferred pension is treated in terms of revaluation in deferment and payment.

It should also indicate  Normal Scheme Pension Age/rules for taking pension early etc.

If you don't have a copy, the Administrator should be in a position to supply or you might find a copy on the internet.

You may be able to obtain online access to your pension details.

MallyGirl

Find out when it is pays out and what it might pay you. Then leave it alone - there is little you can do with it unless it has a transfer value less than £30k which is unlikely after 10 years.

Albermarle

Bramhopewarrior said:

Just curious to peoples perceptions of these? Ive an old one from an old job and its just sat there. Should I leave it alone? How do they work? Listened to my dad when I was young and paid in for 10 years.

It will bring you a guaranteed income when you retire. So along with the state pension, a good basis.

NedS

Bramhopewarrior said:

Just curious to peoples perceptions of these? Ive an old one from an old job and its just sat there. Should I leave it alone? How do they work? Listened to my dad when I was young and paid in for 10 years.

It is very unlikely that it is just sat there. You are what is referred to as a deferred member - that means you are still a member of the scheme and will receive your defined benefits once you reach retirement age, but you are no longer an actively paying into the scheme or maybe in employment of the employer the scheme relates to.

What you have is a promise to pay an annual pension of so much per year once you retire (the figure would have been given to you at the time you became a deferred member of the scheme). Between the time you left and now, that amount will likely have increased in line with inflation every year (this may be capped so check the scheme rules) and will likely continue to do so until death. If the inflation linking is uncapped, then this is often referred to as a gold-plated final salary pension and is as valuable as it gets. Most people here would recommend you do nothing other than sit back in the knowledge that you have an invaluable source of guaranteed income in retirement that will rise with inflation.

arnoldy

A couple of points:

1. In periods of high inflation its often better to keep your pension deferred, the revaluation orders are designed to help preserve the value of your DB in deferment. Once in payment bits of your pension will have increases of 0%, 2.5% and 5% Max (Cap) in EACH year with no compounding from previous low inflation years.

2. There is a sweet spot to taking a deferred DB early. For example assuming death at 83, NRA of 65 and 3% per year reduction for early payment then 57-58 is the optimal time - when you consider size of pension X years likely to receive. Waiting for an unreduced pension at NRA is often the wrong thing, you could end up with "biggest pension in graveyard". Do your own calcs.

Marcon

arnoldy said:

A couple of points:



2. There is a sweet spot to taking a deferred DB early. For example assuming death at 83, NRA of 65 and 3% per year reduction for early payment then 57-58 is the optimal time - when you consider size of pension X years likely to receive. Waiting for an unreduced pension at NRA is often the wrong thing, you could end up with "biggest pension in graveyard". 

...but beware; it isn't that cut and dried. If you are still in employment, taking your pension early could push you into a higher tax bracket. If you are still in employment and continuing to pay into your DB scheme, you are potentially missing out on both a further period of pensionable service and a possible pay rise which (if you are in a final salary scheme) would apply to all your pensionable service.

arnoldy said:

Do your own calcs.

...or get someone to help you do them!

[Deleted User]

arnoldy said:

A couple of points:

1. In periods of high inflation its often better to keep your pension deferred, the revaluation orders are designed to help preserve the value of your DB in deferment. Once in payment bits of your pension will have increases of 0%, 2.5% and 5% Max (Cap) in EACH year with no compounding from previous low inflation years.

2. There is a sweet spot to taking a deferred DB early. For example assuming death at 83, NRA of 65 and 3% per year reduction for early payment then 57-58 is the optimal time - when you consider size of pension X years likely to receive. Waiting for an unreduced pension at NRA is often the wrong thing, you could end up with "biggest pension in graveyard". Do your own calcs.

Thanks so much for the above. 

Interestingly I was speaking to my deferred DB pension admin today re calcs/ commuation rates for PCLS & early retirement options. Im 56 this year and looking to retire fully at 57/8 having landed on 7 years pre NRA as the right time:  early enough to get "early value" but not to early that would reduce pension by too much.  I also like the guaranteed income of a DB pension so dont want to reduce it too much but taking a PCLS and 7 years early.

 I also have substantial other DC/SIPP pensions, rental income & investments so retiring fully & permanently at 57/58 is ideal for me. I dont envisage that I will want to take a PCLS as to be honest I dont need the lumpsum and I prefer instead to reduce my guaranteed DB pension but take it early.  Roll on July 2025!

Pat38493

arnoldy said:

2. There is a sweet spot to taking a deferred DB early. For example assuming death at 83, NRA of 65 and 3% per year reduction for early payment then 57-58 is the optimal time - when you consider size of pension X years likely to receive. Waiting for an unreduced pension at NRA is often the wrong thing, you could end up with "biggest pension in graveyard". Do your own calcs.

OK but is there then a formula that could be applied there once you have the corresponding data from your pension factsheet?

(assuming that you are not still working and in service as per Marcon's comments)

hyubh

Pat38493 said:

arnoldy said:

2. There is a sweet spot to taking a deferred DB early. For example assuming death at 83, NRA of 65 and 3% per year reduction for early payment then 57-58 is the optimal time - when you consider size of pension X years likely to receive. Waiting for an unreduced pension at NRA is often the wrong thing, you could end up with "biggest pension in graveyard". Do your own calcs.

OK but is there then a formula that could be applied there once you have the corresponding data from your pension factsheet?

(assuming that you are not still working and in service as per Marcon's comments)

If the context is your wife's NHS pension, this would be irrelevant because public sector pensions have a different (more generous) treatment.

arnoldy

Here is an example at trying to get a "ranging shot" of when it might be a good idea to take a deferred pension. Yes there are caveats about taking pension early (or indeed waiting) so do your own calcs and thinking. But it might help. I've made up the numbers to illustrate. Best probably to get an IFA opinion as ever rather than internet musings. 

Pension NRA 63, estimated Date of Death 83 (national average), Early retirement factor 2% pa.

Taking at NRA you get 100% pension for 20 years = 1 x 20 = 20
Taking 5 years early you get 90% for 25 years = 0.9 x 25 = 22.5

So overall you could get more taking early (lower pension for longer). 

All I'm trying to say is it is not necessarily true that waiting to NRA (and spending savings or DC pension to get there) is always the right thing.