Pension - real value of additional pension benefit?
Discussion
If I can buy say £1 of additional pension benefit per annum for a purchase price of say £10 (now), how would you look at that? What I mean is, on the surface it appears that if I take my pension for less than ten years, (die), I paid £10 but got less out; whereas if I live longer than ten years I would be quids in. Eg live and claim pension for twelve years, I get £12 back (£1 extra each year) but only paid £10 for that benefit.
But I'm probably overlooking something. So how can that extra value be valued? Is it as simple as above, or is there something more complicated to it?
thanks
But I'm probably overlooking something. So how can that extra value be valued? Is it as simple as above, or is there something more complicated to it?
thanks
If there was such an offer, you'd also need to know who's taking the inflation risk? Does the £1 pension increase, if so, it's worth a lot more. And how old are you, so how many years might you reasonably expect to live. UK average life expectancy is 85.
You might also like to think, if you invest the £10, what return could you get. This is when you realise the problem here - the answer is unkown because of inflation, investment returns, exchange rate changes. Once you swap for a pension, you get certainty of income.
You might also like to think, if you invest the £10, what return could you get. This is when you realise the problem here - the answer is unkown because of inflation, investment returns, exchange rate changes. Once you swap for a pension, you get certainty of income.
Thanks for your help. I don't understand your 25:10 example though? Facts are I can buy £250 block for £2500 lump sum. Maybe I'm missing something but it doesn't sound like a lot?! £20 month extra pension....will I even notice it!
I have £5k savings which I could put in ie but two blocks of £250 additional pension for £5k
I have £5k savings which I could put in ie but two blocks of £250 additional pension for £5k
Your £10 now would be worth say £20 by the time you reach age 65, and would continue to grow thereafter of course.
If you are going to receive £1 pa inflation proofed pension for that, you are likely to have to live to be over 85 just to break even.
If it were me I would put it in a pension arrangement that can offer me more flexibility of how and when I can access it.
If you are going to receive £1 pa inflation proofed pension for that, you are likely to have to live to be over 85 just to break even.
If it were me I would put it in a pension arrangement that can offer me more flexibility of how and when I can access it.
CoolHands,
The price of something, and the value of it, are rarely in accord.. is this one of those occasions? Most of my clients live in a Final Salary world (AFPS) and this is a question that crops up often as they make the transition to civvy street or question the value of buying added pension. Although transferring out of an unfunded final salary scheme is no longer allowed anyway, I send a version of this to clients and loosely refer to it by way of an aide memoire to highlight some differences between the two pension 'spaces' - it might be useful for you in making a determination in whether or not to make a contribution to your existing final salary scheme, start a new, personal one to sit alongside, or do something completely different.
Are the death benefits 'better', different or are there any alternative death benefits – the ability for a spouse, an unmarried partner and /or children (or these days in fact, any other beneficiaries) to inherit your entire unspent personal/ defined contribution pension fund free of inheritance tax. Remember that a spouse very much junior who you might marry knowing that you are very old, very ill and on the cusp of dying, may not benefit as you may wish.
Consider alternative ways of accessing levels of tax free cash, and access to cash - this may allow mortgages to be repaid, debt to be paid off, early retirement etc. Access to cash above your tax free allowance is rated at your marginal rate of course, and the terms of access may change. Which method may serve you better?
Current pension scheme in flux – is your current DB scheme healthy or is it in any measure of deficit? Will the scheme trip its cost settings, will its terms change yet again? This caveat may apply to defined contribution pensions too of course. Do you trust the employer, the investment strategy and the scheme trustees?
Greater flexibility when shaping the benefits – does your DB scheme include a spouse’s pension on death even if you are not married or in civil partnership? But if you are single, do you need this benefit? The benefit won't apply in some cases either, ie, if you're a senile 80 years old and marry a twenty year old Chippendale or Lithuanian pole dancer.
Tax planning – final salary pensions may push you into higher rates of tax. A more flexible personal pension arrangement can enable you to avoid this. Income flexibility and phasing too, you may want to take higher levels of income initially – for example, until the State or other pensions kick in, then reduce the income from your pension later. Will your DB scheme allow you to do this?
Health – if you’ve had health issues and/or are a regular smoker, then it may be possible to replicate DB pension benefits privately using guaranteed annuity rates to obtain a greater level of guaranteed pension. I wouldn't hold your breath with this one though. Better off (potentially) – if, on balance, and using realistic, pragmatic projections, you could well be better off and receive more benefits as a result of such a transfer.
Cash flow - you state that you are in your forties - what is your projected cash flow requirement likely to be, does your DB scheme fit in with this? How risk averse are you? Are you taking into account any benefits that you may be be better using, in the name of your partner? Any new scheme may or may not be better for you in many ways, but at least a DB income stream is guaranteed unless any new scheme slips into deficit and folds. What are your retirement objectives.. what does it 'look like' - if you are retiring abroad then alternative (credible and safe) flexible pension structures *could* be worth exploring. Be careful though, sharks thrive on this space.
Finally, the really big one is this. Will George Osborne change the rules on pension tax relief in the forthcoming budget? If so, do you stand to lose or gain? Finally, again, be mindful of tripping that annual allowance - especially if you are about to experience one of a couple of types of promotion/pay scale transitions.
The price of something, and the value of it, are rarely in accord.. is this one of those occasions? Most of my clients live in a Final Salary world (AFPS) and this is a question that crops up often as they make the transition to civvy street or question the value of buying added pension. Although transferring out of an unfunded final salary scheme is no longer allowed anyway, I send a version of this to clients and loosely refer to it by way of an aide memoire to highlight some differences between the two pension 'spaces' - it might be useful for you in making a determination in whether or not to make a contribution to your existing final salary scheme, start a new, personal one to sit alongside, or do something completely different.
Are the death benefits 'better', different or are there any alternative death benefits – the ability for a spouse, an unmarried partner and /or children (or these days in fact, any other beneficiaries) to inherit your entire unspent personal/ defined contribution pension fund free of inheritance tax. Remember that a spouse very much junior who you might marry knowing that you are very old, very ill and on the cusp of dying, may not benefit as you may wish.
Consider alternative ways of accessing levels of tax free cash, and access to cash - this may allow mortgages to be repaid, debt to be paid off, early retirement etc. Access to cash above your tax free allowance is rated at your marginal rate of course, and the terms of access may change. Which method may serve you better?
Current pension scheme in flux – is your current DB scheme healthy or is it in any measure of deficit? Will the scheme trip its cost settings, will its terms change yet again? This caveat may apply to defined contribution pensions too of course. Do you trust the employer, the investment strategy and the scheme trustees?
Greater flexibility when shaping the benefits – does your DB scheme include a spouse’s pension on death even if you are not married or in civil partnership? But if you are single, do you need this benefit? The benefit won't apply in some cases either, ie, if you're a senile 80 years old and marry a twenty year old Chippendale or Lithuanian pole dancer.
Tax planning – final salary pensions may push you into higher rates of tax. A more flexible personal pension arrangement can enable you to avoid this. Income flexibility and phasing too, you may want to take higher levels of income initially – for example, until the State or other pensions kick in, then reduce the income from your pension later. Will your DB scheme allow you to do this?
Health – if you’ve had health issues and/or are a regular smoker, then it may be possible to replicate DB pension benefits privately using guaranteed annuity rates to obtain a greater level of guaranteed pension. I wouldn't hold your breath with this one though. Better off (potentially) – if, on balance, and using realistic, pragmatic projections, you could well be better off and receive more benefits as a result of such a transfer.
Cash flow - you state that you are in your forties - what is your projected cash flow requirement likely to be, does your DB scheme fit in with this? How risk averse are you? Are you taking into account any benefits that you may be be better using, in the name of your partner? Any new scheme may or may not be better for you in many ways, but at least a DB income stream is guaranteed unless any new scheme slips into deficit and folds. What are your retirement objectives.. what does it 'look like' - if you are retiring abroad then alternative (credible and safe) flexible pension structures *could* be worth exploring. Be careful though, sharks thrive on this space.
Finally, the really big one is this. Will George Osborne change the rules on pension tax relief in the forthcoming budget? If so, do you stand to lose or gain? Finally, again, be mindful of tripping that annual allowance - especially if you are about to experience one of a couple of types of promotion/pay scale transitions.
otherman said:
If your example is literal, and you can really buy £1 per annum inflation linked for £10, then snap off any hand that comes near you with that offer. If you retired at 65 you could happily take £25 for each £10 you put in, with someone else taking all the investment return risk.
^^ ThisIn very round terms the real-world cost of inflation protected pension is about £30 per £1
Or think of it in terms of £100 will buy you £3.33 of pension - which is obviously 3.3%
Look at current % returns from cash or other secure investments ..... then think about ever increasing life expectancy ..... and you can see why pension costs what it does.
One thing I'm not clear on here is whether the £1 is revalued in deferment. I.e. if you pay your £10 now then when you get your pension in roughly 20 years time (assume a pension age of 65), will the £1 p.a. your £10 bought you have been revalued in line with CPI for the intervening 20 years? Or will it start at £1 when you retire, increasing in line with CPI thereafter? If it's the former then you want to bite their hand off and I can't help thinking that whoever is offering it is stark raving mad!
Ginge thanks I will read that later.it is teachers pension so unfounded defined benefits scheme, now career average (my early final salary pension is now stooped). I am probably leaving teaching so this would be my last chance to purchase additional pension in this way, which is why I'm considering it. To chap above :
"Each year your pension will be re-valued, or indexed, and the value of the indexation will be added to your total pension benefits. This process of building up new pension and it being re-valued, will continue each year that you’re in the Scheme.
What is indexation?
This is the annual revaluation of the pension benefits that you’ve built up in the Scheme. Members who are active in the Scheme will have their benefits revalued annually using a rate published by HMT (Treasury Order) plus 1.6%."
I think the HRC order is the CPI. So it's CPI + 1.6%. It therefore seems it is revalued each year, although I note in another publication "This is expected to be below national average earnings increases" but I suppose that's an unknown.
"Each year your pension will be re-valued, or indexed, and the value of the indexation will be added to your total pension benefits. This process of building up new pension and it being re-valued, will continue each year that you’re in the Scheme.
What is indexation?
This is the annual revaluation of the pension benefits that you’ve built up in the Scheme. Members who are active in the Scheme will have their benefits revalued annually using a rate published by HMT (Treasury Order) plus 1.6%."
I think the HRC order is the CPI. So it's CPI + 1.6%. It therefore seems it is revalued each year, although I note in another publication "This is expected to be below national average earnings increases" but I suppose that's an unknown.
Edited by CoolHands on Friday 15th January 19:28
No % max but annual limit of 6500. But I don't have that money so not a problem for me!
With the tps the old final salary is frozen so I still have what I had accrued, and can claim it at normal pension age of 60 because of when I originally joined that scheme, but cannot add to it. The career average we have been moved onto is linked to your govt normal pension age (which for me is 67), although I have exercised buy out to be able to take it at 65 with no penalty. If I purchase additional pension benefits as described in my OP I cannot claim (the additional) until npa of 67.
With the tps the old final salary is frozen so I still have what I had accrued, and can claim it at normal pension age of 60 because of when I originally joined that scheme, but cannot add to it. The career average we have been moved onto is linked to your govt normal pension age (which for me is 67), although I have exercised buy out to be able to take it at 65 with no penalty. If I purchase additional pension benefits as described in my OP I cannot claim (the additional) until npa of 67.
I'd be careful of misinterpreting that figure of £6500, it has caused no end of confusion.
The £6500 is a HM Treasury limit relating to the maximum amount of Added Pension that the member can receive each year in retirement; it does not relate to the amount of contributions that a member may make. You'll have to write to the scheme administrators telling them of the amounts that you want to contribute (lump sum or monthly amounts) or the amount of income in retirement that you want, and they'll write back to you telling you what your new income will be, or what your contributions will have to be. Be careful you don't go over your annual allowance.
You can take your pension before 60 and after 55, but you'll be exposed to an actuarial reduction of c.5% pa.
The £6500 is a HM Treasury limit relating to the maximum amount of Added Pension that the member can receive each year in retirement; it does not relate to the amount of contributions that a member may make. You'll have to write to the scheme administrators telling them of the amounts that you want to contribute (lump sum or monthly amounts) or the amount of income in retirement that you want, and they'll write back to you telling you what your new income will be, or what your contributions will have to be. Be careful you don't go over your annual allowance.
You can take your pension before 60 and after 55, but you'll be exposed to an actuarial reduction of c.5% pa.
Hi final question about this from me, I'm still in a quandry. I am leaving teaching from Christmas onwards. My new job is as basic rate tax payer.
My question is: this will be my last opportunity to purchase this additional pension benefit (as I am still employed in teaching at this moment). I won't be able to access this possibility again in the future. So - would it be worth borrowing 10 grand (as I don't have it handy) in order to purchase £1000 worth of annual inflation-protected pension? I know from above this is a good deal compared with if I was purchasing it privately, but I can't decide if it is fantastic and I should do it (ie I will look back at age 67 and think I'm so pleased I did that) or if I have to borrow to do it it is crazy.
Any last thoughts??!
My question is: this will be my last opportunity to purchase this additional pension benefit (as I am still employed in teaching at this moment). I won't be able to access this possibility again in the future. So - would it be worth borrowing 10 grand (as I don't have it handy) in order to purchase £1000 worth of annual inflation-protected pension? I know from above this is a good deal compared with if I was purchasing it privately, but I can't decide if it is fantastic and I should do it (ie I will look back at age 67 and think I'm so pleased I did that) or if I have to borrow to do it it is crazy.
Any last thoughts??!
It will be, yes, because once you've left the scheme, that chance has gone. Is it a good idea for you? Impossible to say. But if you're now considering buying an added TPS income, look too, at making up your new single tier state pension (if contributions are likely to be short). You were in TPS, so you were contracted out of SERPS/S2P, and although you can't buy back any of those missing years now, you can ensure you don't miss any in the future. It's not sexy, it's not exciting, but it is good basic financial planning.
my basic state pension stands a bit short of 5k at the moment, and the additional state pension part is about 200 quid. But out of interest my wife's is similar basic, but much higher additional state - I can't remember what but something like a couple of grand. She worked in private industry for years though so I presume that's how that bit somehow built up.
I did get all my govt info once to see if I could make up any missing years etc but there was nothing I could do; it is what it is apparently
cheers
I did get all my govt info once to see if I could make up any missing years etc but there was nothing I could do; it is what it is apparently
cheers
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