"Cashing in" a defined benefit pension

DRS1

Marcon said:

DRS1 said:

Marcon said:

DRS1 said:

katejo said:

DRS1 said:

Keep_pedalling said:

The normal pension age for the scheme is also likely to be 60 so you need to see how much your annual payments are being reduced by to take it early as that may also not be a good deal.

Or possibly 65 (so taking it 10 years early which would mean quite a big reduction)

OP Early retirement factors are not usually spelt out in your scheme booklet or even the rules so you will need to ask the administrator.  They do change from time to time so also worth asking if a change is coming (and what it will be if it is imminent and known).

The normal retirement age on my scheme has been gradually going up for several years and will be 67 from Easter next year. 

Hopefully your scheme has been thinking about the impact of that on your accrued benefits.  Maybe it is a DC scheme so not really a concern?

More likely to be a DB scheme where the NRA is tied to State Pension Age in some way. It doesn't normally impact on accrued benefits - but would increase the early retirement factor if someone wants to take them before the scheme's NRA.

Thanks.  I was just thinking £1000 from 65 would be worth less than £1000 from 67. 

Indeed it would - which is why much would depend on when the benefits were accrued. A scheme can't normally do something which is detrimental to benefits already built up before a change to the rules is introduced. That's not the same thing as changing the NRA in accordance with existing rules. 

So at some point in the past when Scheme NRA is 65 and SPA is 65 the scheme changes the definition of NRA to track SPA.

Change permitted because 65 is still the SPA and accrued benefits remain the same.

Govt changes SPA.  Scheme says nothing to do with us we haven't changed anything.

I wonder what the position would have been if the Govt change to SPA was known at the time the scheme changed its rules?

I imagine the scheme could still do it because the change to SPA was from a future date and as at the date of the rule change there was no difference being made to accrued benefits.  But would it pass the smell test?

MeteredOut

bjorn_toby_wilde said:

Cobbler_tone said:

Early reduction factors are not designed to be punitive. 

Not necessarily so, although it’s often quoted on here.

One of my pensions has two sets of ERFs; one generous version for those retiring from active service and a far less generous version for those who had left the company or (as in my case) been made redundant.

3.5% reduction per year for active service and 5% per year for deferred.

Presumably the intent was to encourage people to stay.

As an example of this, here's excerpts from the scheme I was in for a short period of time in the early part of my career. Same ERF for GMP, but different for active/deferred fpr GMP components. But the same late retirement factors for everything/everyone.

MeteredOut

Slight tangent, but I just threw my scheme documents into ChatGPT and asked it various questions - i did something similar a while back with GPT3 and wasn't impressed, but GPT4 is pretty good now. I also gave it the my retirement projections from my scheme website, both my annual pension, and the tax free lump sum and reduced annual pension option.

It gave a full analysis of the scheme, analysing the ERF and LRF, working out the State Scheme Deduction to the penny the same as I've got in my spreadsheet, told me the commutation rate without me asking for it, including whether it was generous, and provided what the various break-even points, which was "better" based on NPV, and what were the pros and cons of taking versus not taking the tax free cash. I asked it various questions around starting the pension early or late, and it gave pretty good results.

I'd never rely on it, but I'd certainly recommend others give it a go.

(I've now run out of my free daily GPT4 credits though)

Suzycoll

Hantrail said:

Good evening all,

I currently have a defined benefit pension from a job I had with my local water company from over 20 years ago.

My pension pot is estimated to be worth around £50K, according to the scheme administrator - I haven't obtained an official transfer value yet though.

I've been offered an annual pension of £2,600 (with no lump sum) from age 55, or a lump sum of £11,000 with annual pension of £1,700 from age 55.

I'm due to turn 55 in the next couple of months and would ideally like to "cash in" the entire value of my pension - I haven't got a copy of my pension scheme rules but I'm pretty sure I can't just cash the lot in under current scheme rules.

What would be the best way of achieving my goal to cash the lot in?

Would it be best to transfer my current DB pension into a suitable DC pension (which would be chosen to allow me to cash the lot in ASAP)?

Any general guidance would be greatly appreciated, thank you.

Hi

I would personally not transfer a DB pension into a DC pension & also not pay a financial advisor 1p for 'advice'

I would suggest take the monthly payments as planned at 55. 😊

katejo

DRS1 said:

katejo said:

DRS1 said:

katejo said:

DRS1 said:

Keep_pedalling said:

The normal pension age for the scheme is also likely to be 60 so you need to see how much your annual payments are being reduced by to take it early as that may also not be a good deal.

Or possibly 65 (so taking it 10 years early which would mean quite a big reduction)

OP Early retirement factors are not usually spelt out in your scheme booklet or even the rules so you will need to ask the administrator.  They do change from time to time so also worth asking if a change is coming (and what it will be if it is imminent and known).

The normal retirement age on my scheme has been gradually going up for several years and will be 67 from Easter next year. 

Hopefully your scheme has been thinking about the impact of that on your accrued benefits.  Maybe it is a DC scheme so not really a concern?

It's a DB scheme (SAUL) and I can access most of it without a large penalty because a large chunk of it was final salary and I continued paying into SAUL beyond my 60th birthday. If I retire before Easter 2027 (I meant 2027 above not next year), I won't be affected at all by the increase to 67). 

So it is not creeping up the same way the SPA is?

It is creeping up. Small parts of my pension will have slight reductions if I retire before 65, 66 and 67 but the money paid in before the switch to career average isn't affected. 

Cobbler_tone

There are several reasons why people do and SHOULD consider taking a DB pension early with reduction factors applied:

• The night shift worker who might be taking years off his life continuing to do so to NRA. In general, a job where your current and future health is likely to suffer.
• Those who can afford to be ‘worse off’ at the relevant point, often 20 years later.
• Those who hate their job and itching to retire but haven’t worked out they could.
• Tax efficiency 

Often it is viewed purely on a financial basis and not with context. As well as no one being able to guarantee that you are actually going to be worse off without an end date.

I just hope that people make balanced and informed decisions and don’t work to their NRA because they have to. It’s not a chase to be the richest in the grave, especially an early one!

Marcon

MeteredOut said:

bjorn_toby_wilde said:

Cobbler_tone said:

Early reduction factors are not designed to be punitive. 

Not necessarily so, although it’s often quoted on here.

One of my pensions has two sets of ERFs; one generous version for those retiring from active service and a far less generous version for those who had left the company or (as in my case) been made redundant.

3.5% reduction per year for active service and 5% per year for deferred.

Presumably the intent was to encourage people to stay.

As an example of this, here's excerpts from the scheme I was in for a short period of time in the early part of my career. Same ERF for GMP, but different for active/deferred fpr GMP components. But the same late retirement factors for everything/everyone.

You'd expect the late retirement factors to be the same - there is no longer any need for the actuary to take into account future salary growth v future revaluation in deferment (see my previous post). Everyone is at the 'same point'.

bjorn_toby_wilde

Marcon said:

bjorn_toby_wilde said:

Cobbler_tone said:

Early reduction factors are not designed to be punitive. 

Not necessarily so, although it’s often quoted on here.

One of my pensions has two sets of ERFs; one generous version for those retiring from active service and a far less generous version for those who had left the company or (as in my case) been made redundant.

3.5% reduction per year for active service and 5% per year for deferred.

Presumably the intent was to encourage people to stay.

I doubt many members spotted the distinction, let alone understood it and stayed around purely because they'd get a better early retirement offer if they asked to retire early.

A scheme has to offer 'fair value' in terms of ERF to all members. There's nothing unlawful about actives getting a better than 'cost neutral' deal (with the employer picking up the tab) - nor is a cost neutral deal punitive for deferreds.

Historically it's related to the way in which scheme funding is done. When the actuary carries out a valuation, active members are 'allowed for' on the basis that their benefits will increase in line with future salary increases. Funding for deferred members is on the basis of statutory revaluation (or whatever the scheme provides, if better than statutory). The employer contribution rate is set accordingly until the next triennial valuation.

Even if the scheme is closed to future accrual, and thus no longer has active members, it's entirely possible that this historic distinction lingered on. If trustee consent was needed to close the scheme to future accrual, the trustees might have used it as a bargaining chip, insisting that those in the employer's service (not necessarily pensionable service) at the time the member applied for early retirement would continue to have a better rate. 

I really don’t get the logic of what you've just said.

If the effect of ERFs on the whole scheme has to be cost neutral then your “better than cost neutral” deal for active members must mean deferred members get a worse than cost neutral deal.

Where else does the extra money come from for the active members?!

bjorn_toby_wilde

Marcon said:

MeteredOut said:

bjorn_toby_wilde said:

Cobbler_tone said:

Early reduction factors are not designed to be punitive. 

Not necessarily so, although it’s often quoted on here.

One of my pensions has two sets of ERFs; one generous version for those retiring from active service and a far less generous version for those who had left the company or (as in my case) been made redundant.

3.5% reduction per year for active service and 5% per year for deferred.

Presumably the intent was to encourage people to stay.

As an example of this, here's excerpts from the scheme I was in for a short period of time in the early part of my career. Same ERF for GMP, but different for active/deferred fpr GMP components. But the same late retirement factors for everything/everyone.

You'd expect the late retirement factors to be the same - there is no longer any need for the actuary to take into account future salary growth v future revaluation in deferment (see my previous post). Everyone is at the 'same point'.

So the actuaries assume future salary growth is lower than revaluation?

QrizB

bjorn_toby_wilde said:

Where else does the extra money come from for the active members?!

I think Marcon is suggesting that it would come from the employer.