Uplift option on DB Pension
Discussion
I've a DB pension due to start paying this year. I've been offered an 'uplift option' of ~25% in return for forgoing the 3% p/a rise on roughly 2/3rds of the payment.
The 'break even' for this uplift is 13 years.
I've never heard of pension uplift before - are they common?
Given that I'm currently in good health and not too short of cash, this doesn't seem a very worthwhile deal.
The 'break even' for this uplift is 13 years.
I've never heard of pension uplift before - are they common?
Given that I'm currently in good health and not too short of cash, this doesn't seem a very worthwhile deal.
Post up all the figures, including both options and the split of level vs escalating. Also, is it fixed 3% or RPI/CPI capped at 3%?
Pension Increase Exchange or PIE is relatively uncommon but a few schemes do it. In the long run you're likely to be worse off by giving up escalation. It can help for example if you're trying to bridge to state pension age and could do with more income now, with the state pension boosting things later.
Pension Increase Exchange or PIE is relatively uncommon but a few schemes do it. In the long run you're likely to be worse off by giving up escalation. It can help for example if you're trying to bridge to state pension age and could do with more income now, with the state pension boosting things later.
Tax is another consideration, if your income is going to be over £12570. You'll lose more in tax with a 25% uplift in those initial 13 years, and you need to factor that in.
As said, age is the big question. If you're retiring at 67, a 13 year break even point is more attractive than if you're retiring at 55.
As said, age is the big question. If you're retiring at 67, a 13 year break even point is more attractive than if you're retiring at 55.
I'm 64, retiring in a year or two.
Just ran a spreadsheet, and can't see the uplift making sense for me at all. Their 13-year breakeven is when the total payments to date are even - the annual payments even out after seven years, and the wonder of compound interest means the £2.3K 'win' you had by then rapidly turns into a whopping loss further down the line. The point re taxation is well taken, thanks!
Increase is 3% fixed on the amount over GMP.
Adding to that, my partner's a fair bit younger so would be badly affected by the uplift.
This isn't my only pension, luckily!
Just ran a spreadsheet, and can't see the uplift making sense for me at all. Their 13-year breakeven is when the total payments to date are even - the annual payments even out after seven years, and the wonder of compound interest means the £2.3K 'win' you had by then rapidly turns into a whopping loss further down the line. The point re taxation is well taken, thanks!
Increase is 3% fixed on the amount over GMP.
Adding to that, my partner's a fair bit younger so would be badly affected by the uplift.
This isn't my only pension, luckily!
I was offered a PIE a few years back, and I posted this on PH:
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
oOo
I could not find earlier thread!
Anyway, I decided not to go with the PIE.
Note that my circumstances are different to the OP as I had already retired whereas he has not.
R.
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
oOo
I could not find earlier thread!
Anyway, I decided not to go with the PIE.
Note that my circumstances are different to the OP as I had already retired whereas he has not.
R.
silentbrown said:
Just ran a spreadsheet, and can't see the uplift making sense for me at all. Their 13-year breakeven is when the total payments to date are even - the annual payments even out after seven years, and the wonder of compound interest means the £2.3K 'win' you had by then rapidly turns into a whopping loss further down the line.
With a fixed percentage increase the comparison is easy to make and it sounds like you've now got your answer. Usually the PIE explanation covers both crossover points but I'd always work it out yourself as you now have. Gassing Station | Finance | Top of Page | What's New | My Stuff