PIE option: to take or not?
Discussion
I have been offered a pension increase exchange (PIE) option. It comes with substantial information and also access to an IFA (free) should I feel the need for advice.
Clearly, the decision whether or not to take the PIE option depends solely on personal circumstances and tolerances etc. This means considering such matters of personal life expectation, future interest rates, future inflation, my lifestyle, the effects on dependents benefits, and to a lesser extent the tax issues and lifetime allowance.
My inclination is not to take up the option. This is based on the fact that the reason the sponsoring company is offering it is to limit and reduce their overall liabilities for financing pensioners’ benefits, which to me must mean there’s an implied reduction in the overall value of my pension benefits if I take the option. I realise that some pensioners will gain by taking the option and others will lose; where I will fit is difficult to determine. Obviously, being a pensioner, I should be risk averse which signals that I should not be giving up future pension increases for a one-off increase now with no increases in the future.
Once advantage of taking the option will be that I could use the one-off increase to invest on a regular basis and hope to outperform the return on the pension ie to do better than the annual increase in the pension that will be paid now and in future years. I could even put it into an ISA which could improve my tax position.
I will be interested in the view of other PHers. I realise that the comments can only be general, not specific to me.
R.
Clearly, the decision whether or not to take the PIE option depends solely on personal circumstances and tolerances etc. This means considering such matters of personal life expectation, future interest rates, future inflation, my lifestyle, the effects on dependents benefits, and to a lesser extent the tax issues and lifetime allowance.
My inclination is not to take up the option. This is based on the fact that the reason the sponsoring company is offering it is to limit and reduce their overall liabilities for financing pensioners’ benefits, which to me must mean there’s an implied reduction in the overall value of my pension benefits if I take the option. I realise that some pensioners will gain by taking the option and others will lose; where I will fit is difficult to determine. Obviously, being a pensioner, I should be risk averse which signals that I should not be giving up future pension increases for a one-off increase now with no increases in the future.
Once advantage of taking the option will be that I could use the one-off increase to invest on a regular basis and hope to outperform the return on the pension ie to do better than the annual increase in the pension that will be paid now and in future years. I could even put it into an ISA which could improve my tax position.
I will be interested in the view of other PHers. I realise that the comments can only be general, not specific to me.
R.
As you’ve already highlighted there’s a reason for these and their advantage to you, or not, is entirely down to personal circumstances and perspectives.
I’d take up the free IFA offer personally, unless you’ve got one you use and don’t mind paying a bit for his opinion. If either is decent they should be able to do some base cash flow analysis based on your own assumptions about life expectancy, returns etc and that may well give you some decent guidance.
I’d take up the free IFA offer personally, unless you’ve got one you use and don’t mind paying a bit for his opinion. If either is decent they should be able to do some base cash flow analysis based on your own assumptions about life expectancy, returns etc and that may well give you some decent guidance.
Obviously take advice on this, and you're thinking the right way.
On a related matter, it may be worth considering the downside of DB schemes and how the PIE may potentially help in this regard:
Spending in retirement is generally front-end loaded - more is spent when still young enough to enjoy it.
DB schemes, outside of perhaps exchanging some pension for a lump sum on retirement, don't do this, the pension is either level or increasing. Taking the time value of money into consideration, £30k p.a. at the age of 90 isn't as useful as £30k p.a. at the age of 65.
By using the PIE you could (depending on terms of the offer, and your age) uplift your pension by up to around 30% (guess) and perhaps better match your spending profile.
Of course, this is only one factor to consider, but thought I'd throw another view into the fray.
On a related matter, it may be worth considering the downside of DB schemes and how the PIE may potentially help in this regard:
Spending in retirement is generally front-end loaded - more is spent when still young enough to enjoy it.
DB schemes, outside of perhaps exchanging some pension for a lump sum on retirement, don't do this, the pension is either level or increasing. Taking the time value of money into consideration, £30k p.a. at the age of 90 isn't as useful as £30k p.a. at the age of 65.
By using the PIE you could (depending on terms of the offer, and your age) uplift your pension by up to around 30% (guess) and perhaps better match your spending profile.
Of course, this is only one factor to consider, but thought I'd throw another view into the fray.
Definitely speak to the IFA and find out what they think.
Also, worth pointing out that this is not a way of the sponsoring employer reducing their liabilities - the idea of a PIE exercise is that the liabilities are the same (and the value of your benefits stays the same) but the employer cuts its exposure to inflation risk.
Also, worth pointing out that this is not a way of the sponsoring employer reducing their liabilities - the idea of a PIE exercise is that the liabilities are the same (and the value of your benefits stays the same) but the employer cuts its exposure to inflation risk.
Twin1 said:
Definitely speak to the IFA and find out what they think.
Also, worth pointing out that this is not a way of the sponsoring employer reducing their liabilities - the idea of a PIE exercise is that the liabilities are the same (and the value of your benefits stays the same) but the employer cuts its exposure to inflation risk.
Has the guidance changed? Also, worth pointing out that this is not a way of the sponsoring employer reducing their liabilities - the idea of a PIE exercise is that the liabilities are the same (and the value of your benefits stays the same) but the employer cuts its exposure to inflation risk.
From when I used to do this, the gain was shared - the majority going to the member. E.g. £10k p.a. RPI linked pension = funding liability of £300k. Remove inflation linkage gives a value of £230k. Share this gain 80/20 gives a new member pension of say £12.5k. The company/scheme will see their funding liabilities reduce.
There are many ways to measure pension liabilities though. The increased pension (post PIE) is likely to be value neutral with the original pension on the transfer value basis - best estimate assumptions are used to calculate the value of your benefits to transfer - with the improved value to the scheme coming through the more prudent funding and buyout bases, reflecting the reduction in inflation risk.
It's cheaper for companies to secure level pensions with an insurance company (no inflation risk) so a PIE can sometimes be an part of strategy to head down this route.
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