DB Pension Increase in Payment - Choices?

BennyBrownBoy

Hi There,

I have two DB pensions, both of which will come into payment in 2024 at NRA 60.

The smaller of the two offers a choice to members for pension increases in payment as shown in the table below. The pension does not contain any GMP and was for a period from 2010-2014.

I'd be grateful for any thoughts on the pros/cons of the Capped and Uncapped options - will have to make a decision in a few months and am a little uncertain which way to go.

Thanks in advance.

Tommyjw

Are the retirement figures different depending on which option you pick? It may be simialr to a Pension Increase Exchange (PIE) option, where you get a higher starting pension but lower increases (capped versions) in the future. As otherwise there'd be no reason to ever pick the capped versions. 

If so, it will depend on how big the differences are .

BennyBrownBoy

Tommyjw said:

Are the retirement figures different depending on which option you pick? It may be simialr to a Pension Increase Exchange (PIE) option, where you get a higher starting pension but lower increases (capped versions) in the future. As otherwise there'd be no reason to ever pick the capped versions. 

If so, it will depend on how big the differences are .

Thanks Tommyjw - no, the starting pension is the same for both option - hence my confusion...

Linton

The dfanger of a capped DB pension is that a single year of inflation higher than the cap will result in a permanent loss of real value in your pension, not just in the year when the cap applies. You dont catch up later even if subsequent years are below the cap.

So caps, especially one as low as 3% I think should be avoided if possible. But the answer to your question depends very much on the initial income each option would give.  It would also depend on what other income you will have in retirement - a cap in a very small part of your income won't present as much risk as if it was a core component.

BennyBrownBoy

Linton said:

The dfanger of a capped DB pension is that a single year of inflation higher than the cap will result in a permanent loss of real value in your pension, not just in the year when the cap applies. You dont catch up later even if subsequent years are below the cap.

So caps, especially one as low as 3% I think should be avoided if possible. But the answer to your question depends very much on the initial income each option would give.  It would also depend on what other income you will have in retirement - a cap in a very small part of your income won't present as much risk as if it was a core component.

Thanks Linton - initial starting income in both options is the same. In reality this is an important but lower part of my retirement income.

What I'm struggling to understand - why would the Capped option ever be beneficial in any circumstances?

eg. if RPI is 1%: both options would give an increase of 1%, however if RPI was say 5%, the Uncapped option would always be favourable.

Any thoughts?

Linton

BennyBrownBoy said:

Linton said:

The dfanger of a capped DB pension is that a single year of inflation higher than the cap will result in a permanent loss of real value in your pension, not just in the year when the cap applies. You dont catch up later even if subsequent years are below the cap.

So caps, especially one as low as 3% I think should be avoided if possible. But the answer to your question depends very much on the initial income each option would give.  It would also depend on what other income you will have in retirement - a cap in a very small part of your income won't present as much risk as if it was a core component.

Thanks Linton - initial starting income in both options is the same. In reality this is an important but lower part of my retirement income.

What I'm struggling to understand - why would the Capped option ever be beneficial in any circumstances?

eg. if RPI is 1%: both options would give an increase of 1%, however if RPI was say 5%, the Uncapped option would always be favourable.

Any thoughts?

Capping is never beneficial in itself to the employee.

If your (ex) employer is offering either capping or non capping on the same initial pension, all other things being equal,  I dont understand it either. I suggest you get the pension people to explain.

Notepad_Phil

BennyBrownBoy said:

Linton said:

The dfanger of a capped DB pension is that a single year of inflation higher than the cap will result in a permanent loss of real value in your pension, not just in the year when the cap applies. You dont catch up later even if subsequent years are below the cap.

So caps, especially one as low as 3% I think should be avoided if possible. But the answer to your question depends very much on the initial income each option would give.  It would also depend on what other income you will have in retirement - a cap in a very small part of your income won't present as much risk as if it was a core component.

Thanks Linton - initial starting income in both options is the same. In reality this is an important but lower part of my retirement income.

What I'm struggling to understand - why would the Capped option ever be beneficial in any circumstances?

eg. if RPI is 1%: both options would give an increase of 1%, however if RPI was say 5%, the Uncapped option would always be favourable.

Any thoughts?

If I'd received such an option to choose from then my first thought would be that I must have missed something as otherwise it makes no sense for anyone to choose the capped option.

If you're sure that the starting pension is the same for both, then perhaps you get a lower lump sum for the uncapped option, or a lower survivor's pension, etc?

Could you perhaps contact them to ask the question of apart from the pension increase what difference there will be to your retirement benefits.

Pat38493

I'm not surprised you are confused - I would suggest you read all the details again to make sure that you haven't missed any differences, and if not ask them to clarify if there are any other implications of choosing uncapped.  If not, then you are correct I don't know why they are even asking the question.

Marcon

BennyBrownBoy said:

Hi There,

I have two DB pensions, both of which will come into payment in 2024 at NRA 60.

The smaller of the two offers a choice to members for pension increases in payment as shown in the table below. The pension does not contain any GMP and was for a period from 2010-2014.

I'd be grateful for any thoughts on the pros/cons of the Capped and Uncapped options - will have to make a decision in a few months and am a little uncertain which way to go.

Thanks in advance.

As you say, if the initial pension is the same, it's hard to see what is going on here. Please find out and update the thread - it really is interesting! I suspect that someone has done a cut and paste job and quite simply pasted the wrong information in the wrong place.

BennyBrownBoy

Thanks everyone - I plan on writing to the provider today and will update the thread when I receive a response.

May take a little while - they are never the quickest to respond...

Farside71

It could be the wording is bad and it refers to two different sets of people, those with capped option and those without, otherwise I also fail to see the point.