Uncrystallised DB pension reduced in value

Jeffmusicals

Hi,

i was made redundant exactly 4 years ago and at the time I asked for a pension illustration on my DB scheme with the Company I had worked at for over 15 years. At the time the offer was £97k lump sum and £14,800 pa. I chose not to take it but 4 years later I have just asked for a revised figure and they have said £90k and £13,400 pa. I know there have been some turbulent times but in the same period my DC scheme has grown significantly. I tried to transfer my DB scheme back then hit of course couldn’t get anyone to give me positive advice. My question is (crystal balls ready!) do I hold my nerve and hold off taking it in the hope that this might change in the next couple of years? I am 60 now and will probably retire at 63. Part of me is a little miffed that I could have drawn £60k in the last 4 years and got an extra £7k lump son but I naively thought of if I left it longer it would improve because I hadn’t drawn it. The reason I am looking is I want to pay off my mortgage and take some pressure off. Any thought, suggestions or pearls of wisdom welcome. I am a higher rate taxpayer and would increase my pension contributions by the amount of the annual DB pension to boost my DC before retirement.

HappyHarry

DB pensions don’t drop like this.

It may be that your previous illustration was based on you continuing to work until normal retirement age?

Jeffmusicals

Thanks for replying and that’s what I thought. The illustration was for me to retire then at the age of 56. I didn’t think that it would have dropped in value but may be I missed something. I want to know if I can/should challenge their calculations? It’s AJG who administer it.

zagfles

DB pensions are paid according the scheme rules not investment returns etc. It's unusual for them to go down but it might be because eg the scheme gives more favourable early retirement terms on redundancy or if you take it immediately on leaving. You'll need to look at the scheme rules, do you have a booklet explaining how it works?

SarahB16

Could it be that the previous quote you received didn't have an actuarial reduction applied as you were taking redundancy?

Marcon

https://forums.moneysavingexpert.com/discussion/comment/82011448#Comment_82011448

Sounds as if you might have been offered a heavily enhanced pension as part of your redundancy package - in particular, no reduction because it was being paid early (a massive benefit), provided it was put into payment at the time you left service. If you didn't pursue it, that offer would have lapsed and you are now (almost certainly) just a 'normal' deferred pensioner.

 I am 60 now and will probably retire at 63.

I wonder if your scheme's retirement age is 65? If so, there's probably a reduction factor kicking in if you apply to take your pension early, which could account for some of the difference.

I want to know if I can/should challenge their calculations?

Nobody here knows the rules of your scheme, so there's no harm in asking AJG to explain. Tell them what's bothering you or they won't know - yes, that's blindingly obvious, but you'd be surprised how many pension scheme members think that mind reading is on the cards in the mystical world of pensions.

 I tried to transfer my DB scheme back then hit of course couldn’t get anyone to give me positive advice. 

You could still have transferred. The requirement is to receive advice, not follow it! Where advice is mandatory, the DB scheme can't pay the transfer until they've established that you've received advice, but they will neither know nor want to know what the advice says. The adviser giving the advice (and it has to be full, not abridged, advice) must sign the certificate to confirm they've done so.

Armed with such a certificate, the way is then clear to transfer to a stakeholder pension - which must accept any transfer from a UK registered pension scheme. You can set one up for yourself and then arrange the transfer yourself.

Jeffmusicals

I can’t believe I have been so stupid. Having looked (more!) carefully at the previous offer it was indeed an enhanced offer instead of redundancy, you were all correct. So sorry for wasting your time! I hope you’d indulge me a little more with my dilemma about the wisdom of what I am considering. So I would use £50k of the lump sum to clear my mortgage and £15k to clear all other debts which would save me £1300 per month. It would then be my intention to increase my DC contributions to around £40k through salary sacrifice to dramatically reduce my tax bill to bring me my effective earnings to around 90k. Does that sound a not crazy idea? I know everyone’s situation is differently and difficult to give anything definitive. Is there anything I could do to boost my options on retirement? My issue is that I know the £13.5k DB pension will attract 40% but I know I can’t take the lump sum without triggering the annual pension. Re the DB to DC option a few years ago, no-one would give the advice I needed to allow the DB scheme to transfer my CETV ) £550k at the time). I doubt that has changed..

QrizB

You might want to read about lump sum recycling:

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

You might be in scope.

Jeffmusicals

https://forums.moneysavingexpert.com/discussion/comment/82011555#Comment_82011555

Thank you. I did take a look but I thought that I am using my DB tax free lump sum to reduce my debts, allowing me to salary sacrifice from PAYE earnings in my current job. I didn’t think that qualified as recycling bit would appreciate peoples views.

QrizB

I don't know your financial details.

If you follow the Royal London flowchart what box do you get to before you reach a "recycling hasn't happened" outcome?

It looks to me as though you're a "yes" at boxes 1 and 2, but how about 3-5?

(HMRC might never notice but it's worth keeping it in mind.)

Marcon

https://forums.moneysavingexpert.com/discussion/comment/82011569#Comment_82011569

The snag is that money is fungible - and it's therefore hard to demonstrate that the lump sum you received is used to settle debts whereas your hefty increase in pension contributions has definitely been paid from a different source. Frustratingly nobody can give you a definitive answer, because HMRC's 'guidance' is vague and they won't pre-clear contributions.