CS Alpha - How to give surviving dependent spouse same pension?

michaels

So the default for the CS pension is that the named dependent (eg spouse) will get a pension of 37.5% of the members pension if the member dies first.

I want my spouse to get more than this, there is a process called Allocation whereby the member accepts a lower pension and the survivor pension is increased, the exact ratio of pension given up to pension gained depends on relative ages.

There is also the option to take an actuarial reduction for my pension and take payment earlier. I am planning to do this and take the pension at about 58.

First question - my understanding is that taking an actuarial reduction does not also reduce the survivors pension which remains at 37.5% of the unreduced amount (Example if a 10k pension at 67 is taken as 6k at 58 then the survivors pension remains at 3750) Is this correct?

Second question - how does this then interact with an allocation. Suppose the allocation factor was 3, could I give up £500 of the remaining 6k in the example above and my wife would then get £1500 on top of her 3750, so 5250 altogether?

Finally is allocation likely to be good value compared to say purchasing an index linked income replacement insurance policy with a term lasting until I am 90?

This is obviously about making sure that on my first death my wife is not made much worse off because a large proportion of our retirement income comes from my DB. Does anyone have any other methods for doing this - I am looking for ones that do not leave inflation risk or longevity risk like a fixed life insurance sum.

hugheskevi

my understanding is that taking an actuarial reduction does not also reduce the survivors pension which remains at 37.5% of the unreduced amount (Example if a 10k pension at 67 is taken as 6k at 58 then the survivors pension remains at 3750) Is this correct?

That is correct.

Second question - how does this then interact with an allocation. Suppose the allocation factor was 3, could I give up £500 of the remaining 6k in the example above and my wife would then get £1500 on top of her 3750, so 5250 altogether?

You first do the actuarial reduction calculation to produce the pension that will be put into payment following the reduction.

Assume a male member with a female beneficiary in the alpha scheme. The factor table is the x-801 tab of this spreadsheet (note it is due to be updated with new factors soon). The guidance is at this link.

You note the relevant factor from the x-801 tab based on the member and beneficiary age. Assume that the pension is taken by the male member at age 58 and their female dependent is aged 55. The relevant factor is 5.502.

The amount of pension you elect to forego from the actuarially reduced amount is multiplied by the factor. So if you chose to reduce your pension by £100 then the future survivor pension payable would increase by £550.20 following the example in the paragraph above.

Note the amount of allocation possible is capped. The rule is set out at regulation 87 of the alpha regulations.

Finally is allocation likely to be good value compared to say purchasing an index linked income replacement insurance policy with a term lasting until I am 90?

The calculations are set to be actuarially neutral based on a discount rate of CPI+2%. I don't know how that would compare to index linked income replacement insurance, but my first thought would that I wouldn't expect insurance to be able to compete with CPI+2% return even based on current bond yields once you take load factors into account.

This is obviously about making sure that on my first death my wife is not made much worse off because a large proportion of our retirement income comes from my DB. Does anyone have any other methods for doing this - I am looking for ones that do not leave inflation risk or longevity risk like a fixed life insurance sum.

State Pension deferral by the beneficiary could be considered, but would only be effective for fairly small sums. Tax positions of each individual may well be relevant in the decision - allocating income from a higher rate taxpayer would be more attractive than if they are a basic rate taxpayer, for example.

LHW99

Finally is allocation likely to be good value compared to say purchasing
an index linked income replacement insurance policy with a term lasting
until I am 90?

No idea on any of your questions, but if you are both in good health currently, why not take the higher income, save some excess (& some lump sum if you take it) into a SIPP for her (£2880 pa even if she doesn't earn) and use that saved money when she approaches SPA (or later) to buy her a single life RPI annuity, with a suitable guarantee period, to safeguard what she needs

That income could also be saved against the grim reaper calling, and used for another purchased annuity later. No idea how the relative costs would work out, but maybe worth looking into.

michaels

Thanks both