DB Pension Offer

Sarahspangles

Lifematters said:

Found early reduction values online and appears it is 27.4% reduction for taking it 7 years early.  So that would be £3,878 at 60 for £85k.  That would take over 20 years to recoup so not really a fantastic offer do you think? I know the DB will increase each year but so may the DC increase by more, just not guaranteed.  Arghh decisions! 

Schemes like LGPS don’t set out to penalise those who take their pension early, they aim to pay out the same amount over the time you draw your pension - if you’re Mr or Ms Average. It assumes an average age at death somewhere in the early 80s.

If you do decide to pay into a DC pension instead, you need to work out the gross contribution for your DB and DC scheme and ensure it’s within your relevant UK earnings. If you work part time you probably don’t need to be concerned about the separate limit of Annual Allowance, for which you would need to know the PIA (Pension Inout Amount) for your LGPS scheme.

Secret2ndAccount

Yes, this very much looks like a transfer from a DC into a DB to purchase additional DB pension. 
The offer appears to me to be fair. Not special, but reasonable. Therefore your decision is not so much about value as about risk. Do you want a DB where you know the money will drop on to your doormat, guaranteed, for the rest of your life? Or do you want a DC where you might choose to spend more now and less later, and anything left can be passed by inheritance, but the money could run out?
If you can't decide, I would stick with DC for now, as you could probably purchase an annuity at a similar price on the open market. Three points to think about:
1. Annuity rates are pretty good right now. It's possible you could decide to go for an annuity in a few years, and be offered a smaller return;
2. If you have any health conditions, these could push up the returns from an open-market annuity, and make it more sensible to purchase via that route.
3. When purchasing on the open market, you normally take the 25% tax-free cash, and purchase the annuity with the other 75%. So if you really want to go all in with the annuity, buying into the DB might be better.

Lifematters

I think I have a preference for guaranteed income which is why I requested a quote from LGPS. If I do the transfer it will bump my DB pensions to just over £21k per annum at 60, which I think is a fortunate position to be in. 

hugheskevi

Lifematters said:

I think I have a preference for guaranteed income which is why I requested a quote from LGPS. If I do the transfer it will bump my DB pensions to just over £21k per annum at 60, which I think is a fortunate position to be in. 

It would be worth comparing outcomes net of tax under this course of action compared to not transferring and using the DC pension from age 60, then commencing the LGPS pension when the DC pension runs out.

If you were taking £21,000 p/a entirely from a DC pension, a good chunk of it would be 0% tax (£16,760) whereas only £12,570 of the DB would be tax free. With the tax advantages and a small amount of growth (you would probably invest it defensively given the short time horizon) you should get about 5 years from the DC pension before then commencing the DB pension.

At about 4% p/a actuarial reduction, that would mean something like a 8-10% reduction rather than a 27.4% reduction to the DB pension, which might result in a higher guaranteed income from about age 65.

Lifematters

Thank you, that has given me something to think about.

Silvertabby

Lifematters said:

Found early reduction values online and appears it is 27.4% reduction for taking it 7 years early.  So that would be £3,878 at 60 for £85k.  That would take over 20 years to recoup so not really a fantastic offer do you think? I know the DB will increase each year but so may the DC increase by more, just not guaranteed.  Arghh decisions! 

Looking at one of your previous posts, it seems that your LGPS pension is an old, deferred, record that met/still meets R85 at 60.  So zero reductions if taken then.

Is this not still the case - or did you re-join the LGPS and are talking about new rules benefits?

Lifematters

@Silvertabby Yes I’ve rejoined the LGPS so have opportunity to purchase more DB with a DC pot transfer. I will then have separate DB’s unless I link them but that will mean losing R85 at 60 on the old one I think. 

Silvertabby

Lifematters said:

@Silvertabby Yes I’ve rejoined the LGPS so have opportunity to purchase more DB with a DC pot transfer. I will then have separate DB’s unless I link them but that will mean losing R85 at 60 on the old one I think. 

Yes, with a gap of more than 5 years, if you join your LGPS benefits then the old record will be converted to CARE with a NRA of SPA.

As you would also lose the final salary link, have you considered not linking the two records?  

Lifematters

Yes, with a gap of more than 5 years, if you join your LGPS benefits then the old record will be converted to CARE with a NRA of SPA.

As you would also lose the final salary link, have you considered not linking the two records?   

I don’t intend linking the two records, I would lose R85 on the old one and as you say the final salary link. Unless the conversion to CARE gave me better value I would reconsider but have not been given the figures for that.