Puzzling DB Pension Forecast

Storcko14

I have a small FS DB pension resulting from a short period of employment from late 1980s and am now invited by the administrator to explore my options using their shiny new calculator, including taking the pension in 18 months at NRA (60), taking it early or deferring it.  When I do this I get surprising results.  My pension if taken exactly at NRA would be 1.25 lump sum and 1.0 pa.  If delayed a year (61) it's 1.3 and 1.08 respectively which makes sense.  It gets weird though if I was to retire next month - in this case the lump sum jumps to 4.5 with 1.2 pa pension and increases gradually until I'm 59 years and 363 days old after which it falls off the cliff.  Note I was contracted-out so it's subject to GMP with a fixed revaluation of 7% pa and equalisation. Still, it makes no sense to me unless I'm missing something so I assume it's an error in their spreadsheet.  The amounts involved in my case are pretty trivial but others planning to retire early using this tool might end up with a bit of a surprise one way or another so I'm interested to get the thoughts of those here who understand these things better or have had any similar experiences. 

Pat38493

Even the main numbers at NRA seems a bit odd to me because typically we would see a lump sum to be between 12 and 25 x the amount of the annual pension if it’s an PCLS lump sum.  For sure the amounts behind higher before NRA does not make much sense and should be questioned.

Storcko14

Thanks Pat.  I suspect there might be a formula error in the spreadsheet that likely sits behind the tool - I've worked in IT in FS for a long time and have seen a few in production.  I wasn't even expecting a lump sum as none of the minimal correspondence that I've received over the  years has mentioned it.  It's only since they launched a new website with more interactive features that I've started to pay attention.  I'm tempted to submit an application online and see what transpires.  It's a special brew and baked beans kind of a sum so doesn't massively impact planning.

Marcon

Storcko14 said:

Thanks Pat.  I suspect there might be a formula error in the spreadsheet that likely sits behind the tool - I've worked in IT in FS for a long time and have seen a few in production.  I wasn't even expecting a lump sum as none of the minimal correspondence that I've received over the  years has mentioned it.  It's only since they launched a new website with more interactive features that I've started to pay attention.  I'm tempted to submit an application online and see what transpires.  It's a special brew and baked beans kind of a sum so doesn't massively impact planning.

Why not just contact them and point out the anomaly so they can correct it?

Marcon

Pat38493 said:

Even the main numbers at NRA seems a bit odd to me because typically we would see a lump sum to be between 12 and 25 x the amount of the annual pension if it’s an PCLS lump sum.  

A small, old DB pension with GMP revaluing at a fixed high rate is likely to limit the amount which could be taken as tax free cash, otherwise there won't be enough to pay the GMP when it falls due.

Storcko14

Marcon said:

Pat38493 said:

Even the main numbers at NRA seems a bit odd to me because typically we would see a lump sum to be between 12 and 25 x the amount of the annual pension if it’s an PCLS lump sum.  

A small, old DB pension with GMP revaluing at a fixed high rate is likely to limit the amount which could be taken as tax free cash, otherwise there won't be enough to pay the GMP when it falls due.

That's my understanding too hence the NRA numbers made a lot more sense that the pre 60s.

GMPEqCommenter

Storcko14 said:

I have a small FS DB pension resulting from a short period of employment from late 1980s and am now invited by the administrator to explore my options using their shiny new calculator, including taking the pension in 18 months at NRA (60), taking it early or deferring it.  When I do this I get surprising results.  My pension if taken exactly at NRA would be 1.25 lump sum and 1.0 pa.  If delayed a year (61) it's 1.3 and 1.08 respectively which makes sense.  It gets weird though if I was to retire next month - in this case the lump sum jumps to 4.5 with 1.2 pa pension and increases gradually until I'm 59 years and 363 days old after which it falls off the cliff.  Note I was contracted-out so it's subject to GMP with a fixed revaluation of 7% pa and equalisation. Still, it makes no sense to me unless I'm missing something so I assume it's an error in their spreadsheet.  The amounts involved in my case are pretty trivial but others planning to retire early using this tool might end up with a bit of a surprise one way or another so I'm interested to get the thoughts of those here who understand these things better or have had any similar experiences. 

I've occasionally seen this happen legitimately (although it could also very well be an error). In those cases what has been happening is that you're expected to get a sudden increase in your pension (usually at age 65) if you retire at NRA; however, if you retire early they instead take that pension step-up and spread it over your entire period of retirement. So you get the same overall value of pension (give or take various actuarial assumptions), but it's distributed differently.

At what rate does the pension increase once it's in payment? The position I've described above is more likely if the pension increases are expected to be nil or very low, and if your GMP is a large proportion of your total pension (at least by the time you get to 60 / 65). Edit: Or alternatively, if your GMP doesn't actually get any revaluations until you reach 65.

Storcko14

Thanks @GMPEqCommenter.  It increases by RPI up to a max of 3% pa for the post 1988 GMP amount (the post '88 bit is 90% of the total) with no increases for pre '88.  The total pension at GMP age (65) is 117% of the age 60 quote but as explaining above that's a lot less than the pre 60 quotes.  I'm guessing from your user name that you can explain how GMP equalisation works?  If so any info appreciated.

GMPEqCommenter

I have a decent understanding of GMP equalisation, which I can try to share with the caveat that the details can get very complicated at times. 

The high level overview is that for pension accrued after 17 May 1990, schemes have to make sure that GMP doesn't cause the total pensions paid to an otherwise identical man and woman to be different. This is a problem because GMPs are themselves unequal in a way that is enshrined in legislation - broadly, they were trying to replicate features of the state pension, so female GMP stops accruing and comes into payment at 60 rather than 65, and then to compensate for the shorter period of accrual, accrues at a faster rate for females. Because the GMPs are fixed to be different, rather than changing the GMP itself you have to fudge the rest of the pension around it so that the total pension remains the same. 

Generally the calculations are done by working out what your original pension accrued after 1990 would be, what it would be if you were the other sex and then if necessary making an adjustment to your pension to change the total to that of the better off sex.

Alternatively, you can completely get rid of GMP in a process called "GMP conversion", which changes your pension into a different pension which is expected to be worth the same overall as the pension of the sex which is better off, but may be at a different level (higher or lower) in different years.

I tried to put together a walk through of how GMP equalisation might work for one particular member at the link below. Unfortunately your scheme will almost certainly have different benefits, and you will be retiring under different circumstances (in particular, only retirement at NRA was relevant in the example, not early or late retirement, so I ignored them), so whilst many of the same principles will apply, most of the specifics won't. I therefore don't know how useful it's likely to be (especially as people were commenting that it was too complicated in its original context...)

https://forums.moneysavingexpert.com/discussion/comment/80879125#Comment_80879125

If there's anything on GMP equalisation you want me to go deeper into I can try. However, I should caveat that how equalisation would affect you specifically will rely on a lot of minor details of your Scheme's benefits as well as your own particular circumstances. It's entirely possible that your scheme has some random rule or established practice that I would never even think to ask about that would completely change how things work and which sex is better off. If you need something about the impact on your benefits specifically you're therefore better off asking your Scheme directly (and unless your question is on a standard FAQ list, patiently working your way through the layers until your question gets passed to someone who was involved in the original calculations and can dig out your calc to see what was going on - this will not be anyone on the front desk, and in the vast majority of schemes will be a completely different department or even company).

xylophone

You mention GMP age of 65 so assume that you are male.

You were a scheme member for a short period pre 1988 and at least five years thereafter?

Do you have your statement of deferred benefits on leaving showing pre 88 GMP,  post 88 GMP and excess?

If so, what does it show?

What does your Scheme Guide have to say about how your  excess pension revalues in deferment?

If you take the pension at age 60 (Scheme NRA), is it the case that you will receive unrevalued GMP, and excess revalued to age 60 with step up at age 65?

See example here https://forums.moneysavingexpert.com/discussion/comment/63406494/#Comment_63406494

for a male taking his deferred Barclays FS pension (Fixed Rate GMP revaluation @ 7%) at age 60 (NRA).

And note the quote if he took his deferred pension pre NRA - the pension would be GMP revalued to early retirement plus excess revalued to early retirement.

https://forums.moneysavingexpert.com/discussion/4736856/barclays-final-salary-pension-gmp-excess-revaluation-anti-franking/p1

Then see this from a member of the same scheme who took his pension at age 51

https://forums.moneysavingexpert.com/discussion/comment/80152287/#Comment_80152287

Does your scheme feature a state pension deduction?

Have you obtained a state pension forecast to help with planning?

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

Pat38493

This may be a silly uestion, but the OP stated that there was equalisation?  I was under the impression that if GMP was equalised at some point, it is no longer relevant?  Maybe there are multiple uses of the term "equalisation" because when my scheme went through an equalisation exercise, they told me that after that, GMP was no longer relevant after that point as everything had been taken care of by other adjustments.  They sent me a table with before and after for each tranche of the pension.