Final Salary Pension scheme - leave or not?
Discussion
DibblyDobbler said:
A chum of mine is a consulting actuary and he could not believe what was being offered - may not last of course!
I think that's broadly equivalent to "Bloody Nora!"It looks real "take the money and run" territory - although you need to be aware the investment risk would become all yours. In part a decision might depend on your view of the financial health of the employer, although if you're being offered this sort of silly money there's clearly plenty of cash around at the moment...
Ozzie Osmond said:
I think that's broadly equivalent to "Bloody Nora!"
It looks real "take the money and run" territory - although you need to be aware the investment risk would become all yours. In part a decision might depend on your view of the financial health of the employer, although if you're being offered this sort of silly money there's clearly plenty of cash around at the moment...
Absolutely. I'm in my late 40s so will sit tight for now (am getting another 1/60th each year). I also have a decent wedge in a SIPP from another job and even though it won't form more than about 20% of my total pot I'm still bricking it every time the market has a wobble. Stuck some in bonds a while back then started reading about the alledgedly forthcoming bond 'meltdown'! Sold out of them sharpish. It remains to be seen whether I can cope with managing my own pot so even though it looks attractive to come out of the FS scheme I'm not yet fully convinced it would be right for me It looks real "take the money and run" territory - although you need to be aware the investment risk would become all yours. In part a decision might depend on your view of the financial health of the employer, although if you're being offered this sort of silly money there's clearly plenty of cash around at the moment...
Oh and the employer is of the 'too big to fail' variety so no worries about that.DibblyDobbler said:
I'm in my late 40s so will sit tight for now ......
Makes sense, but don't expect to see that 40:1 offer in 10 or 15 years time. They're clearly keen to shut off future accrual of those further 1/60ths. You may need to have in mind the potential Lifetime Allowance cap as well if you're on decent earnings.Ozzie Osmond said:
DibblyDobbler said:
I'm in my late 40s so will sit tight for now ......
Makes sense, but don't expect to see that 40:1 offer in 10 or 15 years time. They're clearly keen to shut off future accrual of those further 1/60ths. You may need to have in mind the potential Lifetime Allowance cap as well if you're on decent earnings.
DibblyDobbler said:
Ozzie Osmond said:
DibblyDobbler said:
Basically ... the multiplier is around 40 (a historic high and also depends on age).
Bloody Nora! What have you got, a two thirds index-linked pension payable from age 50?!?!?!Long-dated gilts are yielding less than 1.5% pa nominal (I think) but long-term RPI inflation expectations are still around 3.0% pa. So that's a negative real yield for an RPI linked pension which means that a pension payable for, say, 30 years (e.g. from age 60 to age 90 as a proxy for life expectancy) is perhaps worth close to 40x.
Discounting between age 40 and age 60 would be minimal in real terms.
I have a little old DB pension from a previous employer. I might ask for an updated CETV ...
Similar dilemma.. Final salary pension available, payment of 8 k PA ( aged 55, have a few of these available)
I asked for a transfer value & it is 260K.
8k from 260k sounds pretty poor to me...
I could put it into a drawdown account take more than that for the rest of my days surely (index linked)
If I drop off the perch, better half will get it.
Is the final salary really worth keeping, would IFA agree to transfer to another company/drawdown?
I asked for a transfer value & it is 260K.
8k from 260k sounds pretty poor to me...
I could put it into a drawdown account take more than that for the rest of my days surely (index linked)
If I drop off the perch, better half will get it.
Is the final salary really worth keeping, would IFA agree to transfer to another company/drawdown?
Don't under estimate your life expectancy and inflation, and you would now have to manage it, pay for that, worry about it etc. Remember too, if you have a few bad early years, it could have a really adverse knock on effect on your fund, the sequence of returns is important too.
We've had a few good months, inflation is ostensibly low and that can offer a false sense of security, just wait until we have a bad patch and you read you've lost 5%, inflation has doubled and you're in funds that can't capitalise on that because you want 'safe' and steady.
The case for not transferring isn't as dogmatic or as clear cut as it was a couple of years ago, but remaining in a DB scheme instead of transfering out remains the default best course of action for the vast majority of people.
We've had a few good months, inflation is ostensibly low and that can offer a false sense of security, just wait until we have a bad patch and you read you've lost 5%, inflation has doubled and you're in funds that can't capitalise on that because you want 'safe' and steady.
The case for not transferring isn't as dogmatic or as clear cut as it was a couple of years ago, but remaining in a DB scheme instead of transfering out remains the default best course of action for the vast majority of people.
For those on DB but unfunded schemes the 40x multiplier sounds worrisome - my scheme is valued at x20 atm but I can see the redistributionist wing (Hammond reinforced this today) altering that and applying retrospective taxes. Members of my scheme are already facing a doubling of contributions over the last few years for a reduced pension (RPI -> CPI linkage) and 20 -> 40 -> 60 -> 40 -> 45 (~70% if you include tapering of tax relief) tax rates. An unpredictable CPI/RPI and constantly changing rules mean that it won't be worth remaining a member. The all-risks life insurance is keeping me in atm but soon the equation will tip towards leaving. Many colleagues a year or two older than me are retiring early and others like me are planning either to leave or to reduce workload/earnings to avoid the taper.
If we do that it will reduce the take for the exchequer from direct taxation on income and loss of pension relief / taxation on the hypothetical fund but the consultation document indicates that a loss of £70M to the exchequer last year turns into an increasing benefit from this year onwards - £1.28 Billion more revenue/reduction in tax relief from 2020. What it will do for the public who rely on a significant chunk of the 300,000 people who are likely to be affected / consider reducing their work / retiring early can be discussed but is unlikely to have featured in the analysis.
If we do that it will reduce the take for the exchequer from direct taxation on income and loss of pension relief / taxation on the hypothetical fund but the consultation document indicates that a loss of £70M to the exchequer last year turns into an increasing benefit from this year onwards - £1.28 Billion more revenue/reduction in tax relief from 2020. What it will do for the public who rely on a significant chunk of the 300,000 people who are likely to be affected / consider reducing their work / retiring early can be discussed but is unlikely to have featured in the analysis.
Ginge R said:
Don't under estimate your life expectancy and inflation, and you would now have to manage it, pay for that, worry about it etc. Remember too, if you have a few bad early years, it could have a really adverse knock on effect on your fund, the sequence of returns is important too.
We've had a few good months, inflation is ostensibly low and that can offer a false sense of security, just wait until we have a bad patch and you read you've lost 5%, inflation has doubled and you're in funds that can't capitalise on that because you want 'safe' and steady.
The case for not transferring isn't as dogmatic or as clear cut as it was a couple of years ago, but remaining in a DB scheme instead of transfering out remains the default best course of action for the vast majority of people.
I don't disagree with any of that - when I'm older I *really* don't want to sweating it over the latest stock market crash or whatever. I'm almost hoping the multiplier returns to a normal level and I can go back to plan A which is to sit tight! The big push to leave is the numbers - would you swap £20k per year for £800k? Even if you could get a 3% return you could take £24k per year on the interest alone! Anyway - I have a fair while to contemplate and see how things pan out so no need to rush into anything We've had a few good months, inflation is ostensibly low and that can offer a false sense of security, just wait until we have a bad patch and you read you've lost 5%, inflation has doubled and you're in funds that can't capitalise on that because you want 'safe' and steady.
The case for not transferring isn't as dogmatic or as clear cut as it was a couple of years ago, but remaining in a DB scheme instead of transfering out remains the default best course of action for the vast majority of people.
DibblyDobbler said:
I don't disagree with any of that - when I'm older I *really* don't want to sweating it over the latest stock market crash or whatever. I'm almost hoping the multiplier returns to a normal level and I can go back to plan A which is to sit tight! The big push to leave is the numbers - would you swap £20k per year for £800k? Even if you could get a 3% return you could take £24k per year on the interest alone! Anyway - I have a fair while to contemplate and see how things pan out so no need to rush into anything
Net risk free rates are less than 1%.Revisitph said:
For those on DB but unfunded schemes the 40x multiplier sounds worrisome - my scheme is valued at x20 atm but I can see the redistributionist wing (Hammond reinforced this today) altering that and applying retrospective taxes. Members of my scheme are already facing a doubling of contributions over the last few years for a reduced pension (RPI -> CPI linkage) and 20 -> 40 -> 60 -> 40 -> 45 (~70% if you include tapering of tax relief) tax rates. An unpredictable CPI/RPI and constantly changing rules mean that it won't be worth remaining a member. The all-risks life insurance is keeping me in atm but soon the equation will tip towards leaving. Many colleagues a year or two older than me are retiring early and others like me are planning either to leave or to reduce workload/earnings to avoid the taper.
If we do that it will reduce the take for the exchequer from direct taxation on income and loss of pension relief / taxation on the hypothetical fund but the consultation document indicates that a loss of £70M to the exchequer last year turns into an increasing benefit from this year onwards - £1.28 Billion more revenue/reduction in tax relief from 2020. What it will do for the public who rely on a significant chunk of the 300,000 people who are likely to be affected / consider reducing their work / retiring early can be discussed but is unlikely to have featured in the analysis.
The bit I've put in bold is very interesting to me: it's very rare to see (IME obvs) individual scheme members placing much, if any, value on the risk benefits even though they tend to be substantial. It tends to come up if they seek financial advice (when people suddenly discover they're perhaps over insured) but then again most active DB members of my acquaintance don't seem to be big on seeking financial advice.If we do that it will reduce the take for the exchequer from direct taxation on income and loss of pension relief / taxation on the hypothetical fund but the consultation document indicates that a loss of £70M to the exchequer last year turns into an increasing benefit from this year onwards - £1.28 Billion more revenue/reduction in tax relief from 2020. What it will do for the public who rely on a significant chunk of the 300,000 people who are likely to be affected / consider reducing their work / retiring early can be discussed but is unlikely to have featured in the analysis.
Personal anecdotes being a very poor proxy for evidence etc etc
DibblyDobbler said:
I don't disagree with any of that - when I'm older I *really* don't want to sweating it over the latest stock market crash or whatever. I'm almost hoping the multiplier returns to a normal level and I can go back to plan A which is to sit tight! The big push to leave is the numbers - would you swap £20k per year for £800k? Even if you could get a 3% return you could take £24k per year on the interest alone! Anyway - I have a fair while to contemplate and see how things pan out so no need to rush into anything
One thing to keep an eye on. The government strongly hinted, last week, that the indexation in payment for funded DB schemes could change or even be suspended. It changed for unfunded public sector schemes five years ago. Frank Field has already called it a done deal - he's selling it as short term flexibility in return for long term stability. It's because so many schemes are underfunded and the danger is, the schemes go into protection. Just keep an eye on it, and don't be surprised when/if DB schemes in payment have increases which change/stop. In itself, not a reason to change, but just one more thing to consider. Ginge R said:
One thing to keep an eye on. The government strongly hinted, last week, that the indexation in payment for funded DB schemes could change or even be suspended. It changed for unfunded public sector schemes five years ago. Frank Field has already called it a done deal - he's selling it as short term flexibility in return for long term stability. It's because so many schemes are underfunded and the danger is, the schemes go into protection. Just keep an eye on it, and don't be surprised when/if DB schemes in payment have increases which change/stop. In itself, not a reason to change, but just one more thing to consider.
Interesting - thanks for the heads up.Ginge R said:
One thing to keep an eye on. The government strongly hinted, last week, that the indexation in payment for funded DB schemes could change or even be suspended. It changed for unfunded public sector schemes five years ago. Frank Field has already called it a done deal - he's selling it as short term flexibility in return for long term stability. It's because so many schemes are underfunded and the danger is, the schemes go into protection. Just keep an eye on it, and don't be surprised when/if DB schemes in payment have increases which change/stop. In itself, not a reason to change, but just one more thing to consider.
We will see. Removing RPI increases from pensions basically halves the value of the benefits, give or take.I simply can't see the government permitting DB schemes to destroy member's pensions to that extent, although it would not surprise me if some changes were made.
Revisitph said:
For those on DB but unfunded schemes the 40x multiplier sounds worrisome - my scheme is valued at x20 atm but I can see the redistributionist wing (Hammond reinforced this today) altering that and applying retrospective taxes. Members of my scheme are already facing a doubling of contributions over the last few years for a reduced pension (RPI -> CPI linkage) and 20 -> 40 -> 60 -> 40 -> 45 (~70% if you include tapering of tax relief) tax rates.
OK - I think there may be a misunderstanding here.- I think you are talking about the accrual rate, which means how much pension you "earn" each year for each year that you work. In that part of the universe 1/40th is pretty good and 1/20th would be astoundingly brilliant - more than HMRC will actually permit in a tax-approved scheme. In much of the public sector the "pension promises" offered by many employers have been far too generous. This is why accrual rates are being reduced and/or employee contributions increased.
- The second type of pension is Defined Contribution. Once at retirement people in a Defined Contribution (money purchase) scheme need to decide how to "buy" pension and look at what it will cost. This is where the multipliers being discussed in this thread come in and they are completely different concept from accrual rate. They have no relevance to anyone retiring normally from a Defined Benefit scheme, whether it's a funded private sector scheme or an unfunded public sector scheme.
sidicks said:
DibblyDobbler said:
I don't disagree with any of that - when I'm older I *really* don't want to sweating it over the latest stock market crash or whatever. I'm almost hoping the multiplier returns to a normal level and I can go back to plan A which is to sit tight! The big push to leave is the numbers - would you swap £20k per year for £800k? Even if you could get a 3% return you could take £24k per year on the interest alone! Anyway - I have a fair while to contemplate and see how things pan out so no need to rush into anything
Net risk free rates are less than 1%.sidicks said:
We will see. Removing RPI increases from pensions basically halves the value of the benefits, give or take.
I simply can't see the government permitting DB schemes to destroy member's pensions to that extent, although it would not surprise me if some changes were made.
I reckon it's a done deal, he has wanted it for months and now the government is pushing it. The danger, next, is the GMP on s.32 and PP changing. Can I see the government doing it? Oh yes. It did it to the public sector and the courts signed it off. Compared to the unions, department stores will be a doddle. The thing is, they're Tory heartlanders so Gment has to do if sooner rather than later.I simply can't see the government permitting DB schemes to destroy member's pensions to that extent, although it would not surprise me if some changes were made.
Revisitph said:
An unpredictable CPI/RPI and constantly changing rules mean that it won't be worth remaining a member. The all-risks life insurance is keeping me in atm but soon the equation will tip towards leaving. Many colleagues a year or two older than me are retiring early and others like me are planning either to leave or to reduce workload/earnings to avoid the taper.
Hmmmm. You'd need to think very carefully before walking away from what is probably still a "good" pension scheme compared with what other people are in. Make sure you get a FULL understanding, or a good adviser, before you do anything.Ozzie Osmond said:
OK - I think there may be a misunderstanding here.
In fact, 1/40 would be astoundingly brilliant and 1/20 would be a lottery win!- I think you are talking about the accrual rate, which means how much pension you "earn" each year for each year that you work. In that part of the universe 1/40th is pretty good and 1/20th would be astoundingly brilliant - more than HMRC will actually permit in a tax-approved scheme.
Ozzie Osmond said:
In much of the public sector the "pension promises" offered by many employers have been far too generous. This is why accrual rates are being reduced and/or employee contributions increased.
Accrual rates haven't really been reducing (overall) for public sector workers - schemes that moved to 1/80ths also added a 3/80ths lump sum. schemes that moved to revalued career average actually moved to higher accrual rates 1/52ths.Ozzie Osmond said:
- The second type of pension is Defined Contribution. Once at retirement people in a Defined Contribution (money purchase) scheme need to decide how to "buy" pension and look at what it will cost. This is where the multipliers being discussed in this thread come in and they are completely different concept from accrual rate. They have no relevance to anyone retiring normally from a Defined Benefit scheme, whether it's a funded private sector scheme or an unfunded public sector scheme.
Ozzie Osmond said:
OK - I think there may be a misunderstanding here.
1/20?? Jesus. That's not a pension, that's a bank heist. The promises weren't too generous, they were simply in keeping with prevailing conditions. An early 90s GMP rate was somewhere in the region of c.8% annual increase. - I think you are talking about the accrual rate, which means how much pension you "earn" each year for each year that you work. In that part of the universe 1/40th is pretty good and 1/20th would be astoundingly brilliant - more than HMRC will actually permit in a tax-approved scheme. In much of the public sector the "pension promises" offered by many employers have been far too generous. This is why accrual rates are being reduced and/or employee contributions increased.
- The second type of pension is Defined Contribution. Once at retirement people in a Defined Contribution (money purchase) scheme need to decide how to "buy" pension and look at what it will cost. This is where the multipliers being discussed in this thread come in and they are completely different concept from accrual rate. They have no relevance to anyone retiring normally from a Defined Benefit scheme, whether it's a funded private sector scheme or an unfunded public sector scheme.g
(Edit:That's not to say that successive governments didn't know the system was unsustainable).
Edited by Ginge R on Monday 3rd October 20:46
Gassing Station | Finance | Top of Page | What's New | My Stuff