Logic Check

A question about : Logic Check

I have a deferred DB scheme that covers my employment 82-92 and have recently had an update on estimated pension and the two options I will have at Age 60 (2019).

From the letter:-

Option 1 - Pension of Ј8,897.52 p/a from Age 60.

Option 2 - Tax Free PCLS of Ј29,483.08 plus a reduced pension of Ј4,422.42 p/a.

With Option 2 the pension will increase to at least Ј7,559,24 p/a at Age 65 (GMP payment age). This will be a one-off big increase at 65 as opposed to a steady increase year on year (although the pension in payment increases as well I believe but at much lower rate than the 7.5% p/a GMP rate applied).

No indication of whether the Option 1 pension would rise at Age 65 to reflect GMP element or not.

They have assumed a CPI increase rate of 3% for the portion over and above the GMP.

I have no need to decide for a while yet as you can see but in terms of planning at this stage what option do you think looks most advantageous?

My initial thinking was take Option 2.

BTW - I am assuming I will still be working at 60 and still a member of the LGPS with a very reasonable pension being paid from that at 65.

Thanks.

Best answers:

• Look at it this way: by taking option 2 you would be giving up an inflation linked pension of about Ј4500/year for a lump sum of about Ј29K. Could you guarantee an Ј4500 inflation linked income from a Ј29K lump sum? Answer: you couldnt, nowhere near. An annuity would be nearer Ј1K. In fact its so far out something must be wrong.
  To make a proper comparison we need to know what happens with the Ј8897 pension and GMP. But even if the Ј8897 pension doesnt benefit its still more than Ј1K above the reduced pension + GMP. So on the data given it seems better to go for the full pension everything else being equal. Just covering the period between 60 and 65 would use up over Ј20K of the lump sum.
• On the numbers option 2 makes no sense but I agree with Linton that there's probably a mistake or missing number somewhere.
• There is something not quite right here.
  OP, do you have your scheme booklet and a statement of deferred benefits at leaving?
  Does the statement show pre 88 GMP, post 88 GMP and the excess?
  From what you are saying, it would appear that your GMP is
  revaluing by the fixed rate method. See https://www.barnett-waddingham.co.uk/...what-is-a-gmp/
  so almost certainly a private sector COSR scheme.
  You left after 1991 so the excess must also revalue, albeit by a different percentage.
  https://www.barnett-waddingham.co.uk/...early-leavers/
  Your scheme pension age is 60 but your GMP age is 65.
  Your scheme must pay you a pension at least equal to the revalued GMP from GMP age.
  What seems to happen in your scheme is that at age 60 you are paid the revalued excess plus the unrevalued GMP (the GMP at leaving)- the excess will increase in payment by whatever the scheme rules require and then at GMP age, the pension will be increased by the revalued GMP- presumably after that the whole pension will increase with inflation under scheme rules?
  And if you take the lump sum and reduced pension, or the pension without lump sum at 60, presumably some allowance is being made somewhere for the unrevalued GMP?
• Thanks all.
  I have a copy of the original scheme booklet, a preserved pension certificate, a couple of "latest estimate" letters at various points in time and documents relating to transfer values and benefit levels when transferring it onto other schemes has been an option (but never taken).
  The preserved pension certificate as at August 1992 states:
  GMP - Ј801.84 at point of leaving and estimated as Ј7559.24 at normal retirement age of 65.
  Balance of Digital pension - Ј1092.06 at point of leaving and estimated as Ј5203.63 at normal retirement.
  TOTAL ANNUAL PENSION = Ј1893.90 at point of leaving and Ј12762.87 at 65.
  In addition there was an AVC pot that provided a pension of 310.44 at point of leaving, increasing to Ј1479.25 at 65.
  January 1999 estimate at Age 60 was Ј9359.35 p/a for all of above (GMP + Digital + AVC).
  July 2004 estimate at Age 60 was Ј9710.93 p/a for all of above (GMP + Digital + AVC).
  Finally from a recent email exchange with the administrators:
  "The normal retirement date (NRD) for the Digital Section is age 65, however the Trustees have allowed members to take their benefits from age 60 unreduced (without an early retirement factor applied)."
  GMP rises at fixed rate of 7.5% p/a whilst revaluable element above GMP rose by RPI up until December 2010 when it switched over to CPI.
  1999 and 2004 estimates used 5% for RPI whilst current one in original post uses 3% for CPI going forwards.
  Does that help shed any further light onto things?
• What is the split between pre 88 and post 88 GMP?
  This is important once age 65 is reached as the Trustees have no obligation to inflation link the pre 88 GMP or anything above 3% of the post 88 GMP.
  Looking at the figures, the GMP revalues at fixed rate of 7.5% but the excess does not actually revalue at a fixed rate of 5% or 3%?
  If your scheme is following the rules as set out in the BW link, the excess revalued at RPI up to 5% at least until 2009?
  Did your scheme change revaluation to RPI up to 2.5% in 2009 and have they now switched to CPI or CPI up to 2.5%?
  At age 60, if you do not take a lump sum, is the figure cited made up of GMP revalued to age 60, excess revalued (estimate) to age 60 and the AVC? Or does it include the GMP revalued to age 65?
  How is the value of the AVC calculated?
  How would the pension taken at age 60 increase in payment?
  Have you yet obtained a new style statement for your State Pension?
  
  https://www.gov.uk/government/news/m...sion-statement
• Thanks xylophone - Answers that I can give and additional information below.
  Quote:
• With regard to the new state pension, have a look at this
  https://www.gov.uk/government/upload...acting-out.pdf
  Contracting out will end for LGPS in 2016, by which time the BSP under current rules could be around Ј118 a week, which will be close to your Foundation amount by the looks of things - like the chap in the illustration you should be able to increase this before you reach State Pension Age in around 2025?
  You transferred from one Final Salary Scheme to another in 1982?
  Presumably this simply bought you roughly equivalent benefits in the
  Digital Scheme
  It would be useful for you to know the GMP split pre and post 88.
  The Trustees should be able to advise you of the current value of your revalued GMP, excess and AVC?
  What does your scheme booklet say about how pensions increase in payment?
  If you took option 2 how much of the pension at 65 would be GMP and subject to the pre88/post88 increase rules?
  I must say that I am having problems reconciling the figures.
  You might try a pm to SnowMan who is pretty good with these calculations. https://forums.moneysavingexpert.com/...=#post67746777
  Do you have the option of delaying your pension to age 65?
• Thanks again, I appreciate you taking the time to look at all this.
  Quote:
• Snowman cannot accept any more PMs as his mailbox is full.
• Don't forget that with an SPa date later than 5/4/2016 the GMP inflation proofing by the state (all of GMP for pre 88 and above 3% for post 88) will not occur.
  The scheme has no duty to take over this but they may decide to be generous!
  Is this the Digital scheme as in Digital Equipment Corporation ( DEC ) now HP. If so I assume HP is still funding it?
• Re state pension, the government guidance says:
  "• Under the Government's proposals, if your foundation amount is lower than the full single-tier pension, you can increase the value of your state pension with further qualifying years up until you reach State Pension age.
  • You can do this even if you already have 35 qualifying years. This is likely to be people who were previously contracted out.
  • [
  Each further qualifying year after 6 April 2016 will increase your foundation amount by 1/35th of the full single-tier pension (up to the maximum level)."
  As you know, the GMP must by law be revalued in deferment.
  The Digital Scheme has an obligation to index link the post 88 portion of your GMP pension in payment by CPI up to 3% after GMP age.
  There is no obligation to index link the pre 88 and from what you have said, no obligation to index link the excess in payment if the Trustees so decide?
  I have never come across a DB scheme quite like this before.
  Do you have any old chums who are drawing a Digital pension?
• The GMP on leaving was Ј801.34 and revalues in deferment at 7.5% for 31 years giving a GMP at 65 of around Ј7546.
  This is not in dispute. The OP needs to get the pre and post 88 split from the Administrator.
  He can check with the administrator whether or not existing rules will apply to index linking after GMP age.
  At all events, a portion of the pension he eventually draws will by law have some inflation protection.
  However, it appears that HP have no obligation to index link the excess once it comes into payment - this seems to depend on the grace and favour of the Trustees?
• Further information on the scheme and appropriate documentation / FAQs can be found here:
  https://hp.xpmemberservices.com/Digital/Digital.aspx
  haven't browsed through it yet but will to see if there is anything in there to shed more light.
• The plan booklet seems quite clear on this. Service after April 1997 is uprated by RPI up to a limit of 5%.
  GMP for pre 88 service is uprated by RPI (legally CPI now?) up to 3% because they have to!
  And the rest is up to the plan. The relevant wording out of the plan is:-
  Quote:
• Picking out points from the responses (gratefully received) I think I have the following questions for them:
• GMP - What is the split between pre-88 GMP and post-88 GMP?
• Excess - What is the current value of the excess portion expressed as pension p/a?
• AVC - What is the current value of the AVC portion expressed as pension p/a?
• Age 60 - How do the Option 1 and the Option 2 pension values increase between Age 60 and Age 65 broken down by 2 * GMP elements, excess and AVC?
• Age 65 - How does pension in payment increase from here broken down in the same way?
• Discretionary increases - What has been the increases awarded over the last 10 years?

Does that cover it for now or is there anything else I should add?
Thanks

• I got my pre and post 88 mixed up!
  As at September 2009 the scheme was 94% funded and at March 2010 it was estimated at 99% which I think is highest of the HP schemes (Digital, HP & EDS (multiple schemes for TUPE transfers)).
  As at Octeber 2009 there were 771 active members, 7,529 deferred and 2,393 pensioners.
  Since HP has had to pay some Ј229m into the EDS scheme to get it up to 84% (with further contributions to follow) and Ј73m into the EDS 1994 scheme (ex public sector) I wouldnt have thought there would be much appetite within HP to fund discretionary increases.
  I assume the members are still paying 3% contributions while the EDS scheme is 6.75% for the full accrual amount and the HP scheme went up from 3% to maintain the accrual rates some years ago.
  I assume you have access to the documents?