Final Salary Pension
Discussion
Asking for someone else...really.
So I've always thought that if you paid in for the full 40 years, you got 2/3rds of your final salary, per year, when you retire, or less if they offer you a tax free lump sum.
Say you pay into the scheme for 25 yrs, 1985-2010, then they close it and from that point you go on to a normal personal pension. So I assume you'd get 25/40ths of the 2/3rds. Is that right? And if so, of your salary in 2010 when the scheme closed, or of your actual final salary at retirement?
Obviously you'd supplement it with the benefits your personal pension accrued from 2011 until retirement.
So I've always thought that if you paid in for the full 40 years, you got 2/3rds of your final salary, per year, when you retire, or less if they offer you a tax free lump sum.
Say you pay into the scheme for 25 yrs, 1985-2010, then they close it and from that point you go on to a normal personal pension. So I assume you'd get 25/40ths of the 2/3rds. Is that right? And if so, of your salary in 2010 when the scheme closed, or of your actual final salary at retirement?
Obviously you'd supplement it with the benefits your personal pension accrued from 2011 until retirement.
As someone who chose his career based on relatively low remuneration but awesome cast iron final salary pension, I was upset when final salary scheme was ended.
A) I now need to save more each month to have the same retirement income. My salary has not gone up to reflect this.
B) All those years as a junior I was paying into a scheme that promised to payout based on my FINAL salary, not based on mid career salary. So I was promised something in a contract I will not get.
A pension is deferred salary, so not only have I got an ongoing paycut, I have have deferred pay removed from the previous pay packets.
A) I now need to save more each month to have the same retirement income. My salary has not gone up to reflect this.
B) All those years as a junior I was paying into a scheme that promised to payout based on my FINAL salary, not based on mid career salary. So I was promised something in a contract I will not get.
A pension is deferred salary, so not only have I got an ongoing paycut, I have have deferred pay removed from the previous pay packets.
TwigtheWonderkid said:
Asking for someone else...really.
So I've always thought that if you paid in for the full 40 years, you got 2/3rds of your final salary, per year, when you retire, or less if they offer you a tax free lump sum.
Say you pay into the scheme for 25 yrs, 1985-2010, then they close it and from that point you go on to a normal personal pension. So I assume you'd get 25/40ths of the 2/3rds. Is that right? And if so, of your salary in 2010 when the scheme closed, or of your actual final salary at retirement?
Obviously you'd supplement it with the benefits your personal pension accrued from 2011 until retirement.
It all depends on the accrual rate of the final salary scheme in question.So I've always thought that if you paid in for the full 40 years, you got 2/3rds of your final salary, per year, when you retire, or less if they offer you a tax free lump sum.
Say you pay into the scheme for 25 yrs, 1985-2010, then they close it and from that point you go on to a normal personal pension. So I assume you'd get 25/40ths of the 2/3rds. Is that right? And if so, of your salary in 2010 when the scheme closed, or of your actual final salary at retirement?
Obviously you'd supplement it with the benefits your personal pension accrued from 2011 until retirement.
Using simple numbers, if it was a 1/60th accrual rate then 40 years service would get you a 2/3rds final salary pension (though most are now averaged so to prevent a massive salary increase in the final year).
A 1/80th scheme would therefore pay out a 50% pension after 40 years service.
A 1/40th scheme would pay out a 100% pension after 40 years.
The final salary level is usually increased by wage inflation over the period between you leaving and taking the benefits. This can also differ from scheme to scheme.
JulianPH said:
The final salary level is usually increased by wage inflation over the period between you leaving and taking the benefits. This can also differ from scheme to scheme.
That's the bit I was really interested in. If the employee is still with the same company when they retire, is it usual to use wage inflation since the scheme closed, or to use their actual wage? As someone who was lucky enough to retire on FS before the scheme changed I'd be disappointed if the rules changes mid-way through my career but then most have gone to career average schemes.
As stated if the person contacts the pension provider they will give you an accurate prediction/quote of what you'd get now and what you may get at the full contribution date
As stated if the person contacts the pension provider they will give you an accurate prediction/quote of what you'd get now and what you may get at the full contribution date
was8v said:
The pension provider will give you the accurate figures.
Your optimism is quite charming, if a tad naïve. Although I would have said the same a few months ago. You'd think so, but they provided the employee with some figures, that even a pensions duffer like me could see were incorrect, I composed an email for them to send querying the info provided and saying why they thought it was wrong, and for the last 3 months, have just got "it's with the trustees, you appear to have raised some valid points, we're looking into it, further advices will follow" etc.
Frustrating, but they're not due to retire for a while, so we have plenty of time to resolve it.
TwigtheWonderkid said:
JulianPH said:
The final salary level is usually increased by wage inflation over the period between you leaving and taking the benefits. This can also differ from scheme to scheme.
That's the bit I was really interested in. If the employee is still with the same company when they retire, is it usual to use wage inflation since the scheme closed, or to use their actual wage? JulianPH said:
It all depends on the accrual rate of the final salary scheme in question.
Using simple numbers, if it was a 1/60th accrual rate then 40 years service would get you a 2/3rds final salary pension (though most are now averaged so to prevent a massive salary increase in the final year).
A 1/80th scheme would therefore pay out a 50% pension after 40 years service.
A 1/40th scheme would pay out a 100% pension after 40 years.
The final salary level is usually increased by wage inflation over the period between you leaving and taking the benefits. This can also differ from scheme to scheme.
Bit in bold, that didn't used to be the case though iirc, but then I've been out of that loop for a few years now. When I did my trustee training the HMRC limit used to be a pension of 2/3rds max of your salary, unless my memory is wrong. Distinctly re call being told that having got your 40/60ths in any extra years didn't add to your pension, may have been a bit of wiggle with scheme rules. 40/40ths similar.Using simple numbers, if it was a 1/60th accrual rate then 40 years service would get you a 2/3rds final salary pension (though most are now averaged so to prevent a massive salary increase in the final year).
A 1/80th scheme would therefore pay out a 50% pension after 40 years service.
A 1/40th scheme would pay out a 100% pension after 40 years.
The final salary level is usually increased by wage inflation over the period between you leaving and taking the benefits. This can also differ from scheme to scheme.
So what changed? Was it this lifetime allowance malarkey or? Question is solely for my own education. Thanks in advance
TwigtheWonderkid said:
JulianPH said:
The final salary level is usually increased by wage inflation over the period between you leaving and taking the benefits. This can also differ from scheme to scheme.
That's the bit I was really interested in. If the employee is still with the same company when they retire, is it usual to use wage inflation since the scheme closed, or to use their actual wage? was8v said:
As someone who chose his career based on relatively low remuneration but awesome cast iron final salary pension, I was upset when final salary scheme was ended.
A) I now need to save more each month to have the same retirement income. My salary has not gone up to reflect this.
B) All those years as a junior I was paying into a scheme that promised to payout based on my FINAL salary, not based on mid career salary. So I was promised something in a contract I will not get.
A pension is deferred salary, so not only have I got an ongoing paycut, I have have deferred pay removed from the previous pay packets.
The scheme would have promised to payout based on your final salary when you left the scheme as an active member. That’s what’s happened for you. No breach of contract.A) I now need to save more each month to have the same retirement income. My salary has not gone up to reflect this.
B) All those years as a junior I was paying into a scheme that promised to payout based on my FINAL salary, not based on mid career salary. So I was promised something in a contract I will not get.
A pension is deferred salary, so not only have I got an ongoing paycut, I have have deferred pay removed from the previous pay packets.
Your pension will almost certainly be increased by some form of inflation from when you left the scheme as an active member to when you start to take your pension.
A pension isn’t deferred salary.
TwigtheWonderkid said:
That's the bit I was really interested in. If the employee is still with the same company when they retire, is it usual to use wage inflation since the scheme closed, or to use their actual wage?
Neither in the case of my closed DB pension...different slices of the pension are revalued at different rates as follows, based on my salary at the date the scheme closed:1. GMP (small) portion increases by 4% per year
2. Increases by CPI capped at 5%
3. Increases by CPI up to 2.5%
As such, once the scheme is closed, it makes no difference whether I'm still employed at that firm or not.
Edited by LeoSayer on Friday 11th October 08:42
Mazinbrum said:
TwigtheWonderkid said:
JulianPH said:
The final salary level is usually increased by wage inflation over the period between you leaving and taking the benefits. This can also differ from scheme to scheme.
That's the bit I was really interested in. If the employee is still with the same company when they retire, is it usual to use wage inflation since the scheme closed, or to use their actual wage? One additional point.
When in the defined benefit scheme, it might have involved being 'contracted out' of part of the National Insurance payments.
Employee defined benefit pension payments are sometimes, maybe often, reduced a little from the pure 2/3rds etc. calculation.
Do you think, that the whole employee and state pensions systems are purposely made so complicated, that people give up trying to understand them ? One example was the fairly recent ‘flat rate‘ state pension. Many pensioners have now discovered, that they are not eligible to receive the anticipated ‘flat rate‘ amount.
Jon39 said:
Do you think, that the whole employee and state pensions systems are purposely made so complicated, that people give up trying to understand them ? One example was the fairly recent ‘flat rate‘ state pension. Many pensioners have now discovered, that they are not eligible to receive the anticipated ‘flat rate‘ amount.
It's complicated because successive governments have made minor and major changes to meet objectives such as reducing cost to the government purse and improving fairness, flexibility and engagement. Often these changes trigger further complexity as unintended consequences are ironed out.
Many of these tweaks are necessary because of the opportunities that our progressive income tax regime presents, but arguably, increases in life expectancy have been the main driver for pension regime change in the past 20 years for government, employers and individuals.
If I was going to rely on a certain income in retirement I would make damn sure I understood what I was getting well before I got there.
LeoSayer said:
Jon39 said:
Do you think, that the whole employee and state pensions systems are purposely made so complicated, that people give up trying to understand them ? One example was the fairly recent ‘flat rate‘ state pension. Many pensioners have now discovered, that they are not eligible to receive the anticipated ‘flat rate‘ amount.
It's complicated because successive governments have made minor and major changes to meet objectives such as reducing cost to the government purse and improving fairness, flexibility and engagement. Often these changes trigger further complexity as unintended consequences are ironed out.
Many of these tweaks are necessary because of the opportunities that our progressive income tax regime presents, but arguably, increases in life expectancy have been the main driver for pension regime change in the past 20 years for government, employers and individuals.
If I was going to rely on a certain income in retirement I would make damn sure I understood what I was getting well before I got there.
Setting aside state scheme for a moment and looking at occupational schemes. For example the scheme of which I was for a time a trustee, often held up as an example of a really good scheme, equitable to both employer and employee, this pension scheme became regarded by HMRC as significantly overfunded, in other words not only could we meet our actuarial commitments but the fund was considerably larger than that required. We were told, in no uncertain terms, that unless we took steps to reduce that overfunding then the government would come in and use the money to better purposes, it was unclear precisely how, Labour administration, enough said. Therefore we took steps to deal with this by improving benefits, and reducing contributions.
Immediately you then have a complication, because having changed scheme rules in determining an individual's accrued benefits, you have a number of years on the 'old scheme' and then number of years on the 'new scheme.' That's before you consider any other changes, e.g. years in a 'shop floor' scheme before promotion to 'staff' or 'management' schemes. So the answer is always, as others have stated, you need to have a copy of the various scheme rules and talk to the administrators.
Then you get into the whole Gordon Brown pensions raid and GFC which really hit earnings and resulted in firms having to change scheme rules again but this time simply for survival, both scheme and firm.
There's another factor when looking over the decades, people are much more likely to have had quite a number of jobs and membership of different schemes over their working life, gone are the days of having a single employer 'man and boy', apologies for the somewhat sexist comment there simply for brevity. So now you're not dealing with a single scheme and how it has changed over the years but multiplied by several different schemes and sets of administrators. Not exactly fault of government nor life expectancy, but the basic point is that none of it is deliberate obfuscation.
Having said that very last point, having experienced repeated discussions with the pensions office regarding forecasts for state pensions for my wife and myself, the implementation and responses to question has been abysmal. At times so poor it did begin to feel like deliberate obstruction, even to this day they are unable or unwilling to identify the process of how they have made certain calculations, so I have a certain sympathy with the original question, and indeed I have given up trying to get an answer. How folks who have zero knowledge of pensions deal with it is of concern.
Zingari said:
As someone who was lucky enough to retire on FS before the scheme changed I'd be disappointed if the rules changes mid-way through my career but then most have gone to career average schemes.
As stated if the person contacts the pension provider they will give you an accurate prediction/quote of what you'd get now and what you may get at the full contribution date
As stated if the person contacts the pension provider they will give you an accurate prediction/quote of what you'd get now and what you may get at the full contribution date
I’d be flippin’ furious, particularly if they were effectively “back dated”.....
Zingari said:
As someone who was lucky enough to retire on FS before the scheme changed I'd be disappointed if the rules changes mid-way through my career but then most have gone to career average schemes.
As stated if the person contacts the pension provider they will give you an accurate prediction/quote of what you'd get now and what you may get at the full contribution date
Of course, for many people, some of the public sector career average schemes are more generous than the final salary schemes that they replaced. But no-one wants to admit that!As stated if the person contacts the pension provider they will give you an accurate prediction/quote of what you'd get now and what you may get at the full contribution date
Not_an_IFA said:
Zingari said:
As someone who was lucky enough to retire on FS before the scheme changed I'd be disappointed if the rules changes mid-way through my career but then most have gone to career average schemes.
As stated if the person contacts the pension provider they will give you an accurate prediction/quote of what you'd get now and what you may get at the full contribution date
Of course, for many people, some of the public sector career average schemes are more generous than the final salary schemes that they replaced. But no-one wants to admit that!As stated if the person contacts the pension provider they will give you an accurate prediction/quote of what you'd get now and what you may get at the full contribution date
Countdown said:
I think that's only for those people who stay on broadly the same salary throughout their career (because the new CARE schemes have a higher accrual rate) and I think that's going to be a minority of people. Most people will get promoted at some stage and, with CARE schemes, their entire pension doesn't suddenly get boosted to their highest salary.
Agreed, but the revaluation rate for a ome schemes is very generous, beyond the likely salary increases for those that don’t achieve significant career progression.It’s not just the higher accrual rate that is relevant.
There is certainly a view that average salary DB schemes are much less generous than final salary schemes, due to people not understanding the Risk in CARE (as well as the higher accrual).
Of course it will be much worse for those with significant career progression, but they are the minority.
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