DB Bridging Pension Option Questions

BennyBrownBoy

Hi All,

Would welcome any thoughts on the following:

I have 2 DB pensions which are available to me without actuarial reduction at age 60, this coming June. Both pensions are from 2 different periods of service from the same over-arching scheme, however are treated as two distinct schemes (with differing scheme rules).

I have just requested the figures for each scheme payable from June 2024 (as I do each year) and I have now received correspondence from the administrator.

As expected each scheme provides the option of a full pension with no tax free cash, or a reduced pension with tax free cash (commutation rate is roughly 19:1). This has been the information I have been provided each year for a considerable period and was what I was expecting.

However, in the most recent correspondence I have also been offered a Bridging Pension Option as an alternative in both schemes. This has never been mentioned in any previous correspondence.

This provides a lower scheme pension plus £10,600 per year (the figure is obviously equivalent to a full state pension), the latter figure which will stop at state pension age (67).

This offer is coming from both pensions and therefore appears to be offering "two lots" of the £10,600 Bridging Pension Option until state pension age.

For information, I will qualify for a full state pension at 67. Additionally I have a DC scheme which will form a very small part of my retirement income.

I'd never heard of Bridging Pension Options before this week and am simply looking for some guidance from the forum members:

1) What are the pros and cons of such an option?

2) What sort of considerations should I be mindful of, in making a decision whether this is a sensible option for me?

Thanks as ever.

xylophone

However, in the most recent correspondence I have also been offered a Bridging Pension Option as an alternative in both schemes. This has never been mentioned in any previous correspondence.

The concept of a bridging pension is not new but it is possible that this option has only been offered very recently in your particular scheme(s).

Example from a year or so back.

https://mallowstreet.com/Article/b68437

If this is the case, then it is possible that even the latest available scheme guide will be without explanation/examples.

Equally, there may have been a reprint or even a supplement to add to your scheme guide  - you could enquire about this.

Here is an example  of a warning from one of the old Gas DB schemes which produced a whole booklet devoted to "bridging the gap".

You could give up more than you gain

• The additional pension is paid to you for a fixed period,

up to your State Pension Age, whereas the reduction from

your State Pension Age will continue for the rest of your

life. This means it is possible (depending on how long

you live) to end up ‘paying back’ more pension in total

via the reduction than you gain through receiving the

additional pension.

You will note  that  The Severn Trent Trustees were offering members a free advice session on the newly introduced

 option - is there any mention of this from your Administrator(s)?

michaels

Presumably it is actuarially equivalent to taking the lump sum and using that to bridge the gap but the lump sum may be more efficient tax wise?

Do you have any alternative means of bridge the gap as otherwise having a lower income until 67 and then a higher one later sounds like a poor option.  I plan to use DC (via an index linked bond ladder or fixed term index linked annuity) to bridge the gap from retirement at 55 to DB and SP ages.

jamesd

Don't neglect the possibility of a mortgage for bridging and to allow a limited tax (no tax on borrowing, just payments) lump sum. You can use a term up to say 85 and repay out of the higher long term income.

 Bridging can be a good offer for those without planning but I doubt that the deal is a good one.

Since you're over 55 you should ideally have already moved most non-pension savings into a pension to exploit its tax relief. If not, there's still time to do some.

BennyBrownBoy

xylophone said:

However, in the most recent correspondence I have also been offered a Bridging Pension Option as an alternative in both schemes. This has never been mentioned in any previous correspondence.

The concept of a bridging pension is not new but it is possible that this option has only been offered very recently in your particular scheme(s).

Example from a year or so back.

https://mallowstreet.com/Article/b68437

If this is the case, then it is possible that even the latest available scheme guide will be without explanation/examples.

Equally, there may have been a reprint or even a supplement to add to your scheme guide  - you could enquire about this.

Here is an example  of a warning from one of the old Gas DB schemes which produced a whole booklet devoted to "bridging the gap".

You could give up more than you gain

• The additional pension is paid to you for a fixed period,

up to your State Pension Age, whereas the reduction from

your State Pension Age will continue for the rest of your

life. This means it is possible (depending on how long

you live) to end up ‘paying back’ more pension in total

via the reduction than you gain through receiving the

additional pension.

You will note  that  The Severn Trent Trustees were offering members a free advice session on the newly introduced

 option - is there any mention of this from your Administrator(s)?

Thanks xylophone - the linked article is interesting. Equally there is a similar warning given (as per Gas BD scheme) in the literature I've been provided.

Adminstrators are offering advice on all options through a preferred providers but this is paid - £1400+VAT. I suspect this is only advice for the specifics of the scheme rather than "wider" pension/financial advice - otherwise this would probably be a bargain...

From what reading I've done, it seems that BPOs will ultimately reduce risk/liability for the Scheme and as such I can help feeling that this option probably favours the Scheme as opposed to the pensioner in most cases.

BennyBrownBoy

michaels said:

Presumably it is actuarially equivalent to taking the lump sum and using that to bridge the gap but the lump sum may be more efficient tax wise?

Do you have any alternative means of bridge the gap as otherwise having a lower income until 67 and then a higher one later sounds like a poor option.  I plan to use DC (via an index linked bond ladder or fixed term index linked annuity) to bridge the gap from retirement at 55 to DB and SP ages.

Thanks Michaels - my DB pensions will provide around 95% of my retirement needs and I do have a DC scheme which would more than bridge the gap.

I was more curious about the potential additional value of the BPO (if any) - just in case.

Having read further - there also seems to be an impact on the annual allowance for the tax year if taking the BPO?

xylophone

Having read further - there also seems to be an impact on the annual allowance for the tax year if taking the BP

https://www.lcp.com/our-viewpoint/2023/03/government-takes-the-sting-out-of-pensions-tax-but-some-changes-could-be-short-lived

Many scheme exercises could be back on the table or simplified because of the removal of the blocks previously caused by the need to maintain protections, and indeed not to create LTA charges themselves.  These include Pension Increase Exchange exercises (particularly after retirement) and Bridging pension options – highly popular with members but very inefficient from an LTA perspective.

From what reading I've done, it seems that BPOs will ultimately reduce risk/liability for the Scheme and as such I can help feeling that this option probably favours the Scheme as opposed to the pensioner in most cases.

https://www.wtwco.com/en-gb/insights/2023/08/accelerating-your-pension-scheme-strategy

The successful design and implementation of an ongoing BPO, led by WTW, helped the Scheme reduce risk and move it 5% closer to its funding goal. The Trustees and Company are pleased to have introduced a new option that has been popular members.

BennyBrownBoy

xylophone said:

Having read further - there also seems to be an impact on the annual allowance for the tax year if taking the BP

https://www.lcp.com/our-viewpoint/2023/03/government-takes-the-sting-out-of-pensions-tax-but-some-changes-could-be-short-lived

Many scheme exercises could be back on the table or simplified because of the removal of the blocks previously caused by the need to maintain protections, and indeed not to create LTA charges themselves.  These include Pension Increase Exchange exercises (particularly after retirement) and Bridging pension options – highly popular with members but very inefficient from an LTA perspective.

From what reading I've done, it seems that BPOs will ultimately reduce risk/liability for the Scheme and as such I can help feeling that this option probably favours the Scheme as opposed to the pensioner in most cases.

https://www.wtwco.com/en-gb/insights/2023/08/accelerating-your-pension-scheme-strategy

The successful design and implementation of an ongoing BPO, led by WTW, helped the Scheme reduce risk and move it 5% closer to its funding goal. The Trustees and Company are pleased to have introduced a new option that has been popular members.

Thanks xylophone - interesting articles.

Looking further at what my scheme administrators have sent me they are quoting that for one of the pensions - when taking the BPO option, my 24/25 tax year Pension Input Amount would be £90,160.66, whilst in the other pension with the BPO option the same figure would be £71,919.10. 

So a total pension input amount of £162K. This is £102K about the £60K Annual Allowance. I have no carry-over unused AA from the last three years. Therefore from what I can see if I took the BPO options from my scheme, I would get an immediate tax bill of £102K x 40% (my marginal tax rate) = £40.8K, for exceeding the Annual Allowance.

Whilst this can be paid by the Scheme itself, it will lead to presumably a significant reduction in total benefits.

Struggling to see any real benefit in this option?

Am I missing something?

Thanks.

xylophone

Sorry to land you with yet another link but the discussion here (particularly what you might call the "horses for courses" element), seems relevant to your circumstances.

https://www.lcp.com/media/1150065/making-the-most-of-the-flexibility-within-your-defined-benefit-pension-scheme.pdf

From what you have said so far, you appear to be a person whose circumstances are far from those for whom the BPO could be the wisest option.

Over the years, you have monitored what you expected to receive from these pensions and in addition have made other pension provision.

You were also aware of the age at which you could expect to receive your state pension.

Incidentally, have you applied for a state pension  forecast?

https://www.gov.uk/check-state-pension

I assume that apart from considerations of AA and LTA, you have also taken into account the effect on your income tax position if you took the BPO, particularly if you intend to remain in paid employment after you draw the pensions.



I think that if I were in your position, I'd opt for the status quo but clearly this is very much a personal decision and if you are unsure you could opt to take professional advice.

BennyBrownBoy

xylophone said:

Sorry to land you with yet another link but the discussion here (particularly what you might call the "horses for courses" element), seems relevant to your circumstances.

https://www.lcp.com/media/1150065/making-the-most-of-the-flexibility-within-your-defined-benefit-pension-scheme.pdf

From what you have said so far, you appear to be a person whose circumstances are far from those for whom the BPO could be the wisest option.

Over the years, you have monitored what you expected to receive from these pensions and in addition have made other pension provision.

You were also aware of the age at which you could expect to receive your state pension.

Incidentally, have you applied for a state pension  forecast?

https://www.gov.uk/check-state-pension

I assume that apart from considerations of AA and LTA, you have also taken into account the effect on your income tax position if you took the BPO, particularly if you intend to remain in paid employment after you draw the pensions.



I think that if I were in your position, I'd opt for the status quo but clearly this is very much a personal decision and if you are unsure you could opt to take professional advice.

Thanks xylophone - all reading is useful!

I think on balance BPO is not for me - the penalty (circa £41K) for exceeding the Annual Allowance is substantial and the addition BPO element would put me in the 40% tax bracket in payment. It would also push me further beyond the LTA than I am currently (including the DC when crystallised) - though this now seems a "non-issue".

The real driver for asking questions on the Forum was that I hadn't come across this option previously, and on the surface it looks like I am being offered a BPO amount on both periods of service in the overall pension scheme - which initially "caught my eye". I've asked the Administrators to confirm this today - but probably a moot point.

Have been checking my State Pension forecast for a while now and will have the full amount once the 23/24 tax year declares the NI contribution.

Back to the original plan I think...

Cobbler_tone

I'd been trawling all threads on these as my time is rapidly approaching.
Frustratingly (as with most things), 'it depends' is the answer, which is never a surprise.

1. An advantage is that you may see money that you never would have should the worst happen in the next 10 years (or however long you bridge).
2. The bridge starting point seems to be the state pension amount at the time of starting to take your pension.
2. The spousal part is not impacted...well in the examples I have seen it never is, including my own scheme.
3. You could technically be financially worse off but probably not until you are well into your mid-70's+, at which time you would hope your life plans are suitably sorted. 

I'm airing towards it TBH. I'm not going to trouble 40% tax and have two state pensions to come in 10 years.