DB Scheme - Impact of taking early

[the0ni0nking]

Prompted by another thread, for the first time in probably 5 years I logged on to view my pension statement from an old DB scheme to see how it had moved etc.

I left the scheme in 2008.

When I left, the paperwork states my yearly pension would be £2,333.92 and a one-off lump sum of £6,676.54.

Now, looking at the benefit statement for Apr-24, the three options referenced are take at 55, 60 or 65 with the following results (these are the results taking the bog standard lump sum - it does also provide an alternative if the max lump sum is taken but I'm not really bothered about that and the results in terms of pension uplift between 55/60/65 are very similar):

55:
Pension of £2,895.17
Lump Sum of £9,710.42

60:
Pension of £3,656.16
Lump Sum of £10,566.29

65:
Pension of £3,692.02
Lump Sum of £10,566.29

I'm confused as to why the increase between 55-60 is nowhere close to replicated between 60-65? Surely on the basis of the above everyone would chose either 55 or 60 - no one would choose 65!?

[Urbandreamer]

I'm confused as to why the increase between 55-60 is nowhere close to replicated between 60-65? Surely on the basis of the above everyone would chose either 55 or 60 - no one would choose 65!?

Well those who didn't check might stay until 65. Not everyone wants to retire early though. Some people define themselves by what they do.

[mc2fool]

I'm confused as to why the increase between 55-60 is nowhere close to replicated between 60-65? Surely on the basis of the above everyone would chose either 55 or 60 - no one would choose 65!?

What is the normal retirement age (aka normal pension age) in the scheme? Some earlier DB schemes in particular had NRAs of 60, meaning that you could retire at 60 on a "full" pension, with increases for deferring past that being only minimal.

[Alaric]

I'm confused as to why the increase between 55-60 is nowhere close to replicated between 60-65? Surely on the basis of the above everyone would chose either 55 or 60 - no one would choose 65!?

Defined Benefit schemes would usually have a "normal retirement age". Is it 65 for this sceme. If so the values at 65 are the base amounts and the values at 55 and 60 are reductions from this. Some schemes predefine the reductions whilst others in effect make it up as they go along, or more formally, say they are not guaranteed and based on market conditions, interest rates in particular. The idea for leavers at least is that the ultimate cost to the scheme should be the same regardless of when retirement is selected.

If the values at 60 are much better than at 65, then yes, it can be to the benefit of the member to start drawing early if permitted. In a longer run, it's a lower annual amount though.

[the0ni0nking]

What is the normal retirement age (aka normal pension age) in the scheme? Some earlier DB schemes in particular had NRAs of 60, meaning that you could retire at 60 on a "full" pension, with increases for deferring past that being only minimal.

In the pension statements, it says " we will pay your benefits from XX" which is the date I would be 65.

However, the letters I (used to) receive from them only ever showed what "my pension is worth now" - not showing a split between what would happen if I took it at 55/60 and not 65.

Only by logging on did I see that detail which strikes me as very cynical way to do things - and this isn't really about early retirement as you can continue to work while drawing your pension.

[Alaric]

- and this isn't really about early retirement as you can continue to work while drawing your pension.

In the common jargon of the pensions world, "early retirement" is used as a proxy for "draw your pension before the scheme's statutory age".

[monabri]

Your pension increases by 1/60th for 40 years until you max out at 40/60ths. So, if you started at say, 20 years old, at 60 years of age you have maxed out with 40 years of contributions. Your figures are unique to you.

Then again, what is your retirement age on the scheme as they might be applying a 4% reduction for every year you retire early ( assuming 65 was the retirement age for your particular scheme).

[mc2fool]

Your pension increases by 1/60th for 40 years ...

Only if you're an active member of the scheme but the OP has been in deferment since 2008.

[Alaric]

In the pension statements, it says " we will pay your benefits from XX" which is the date I would be 65.

I suspect you need to ask some more questions of the scheme about what benefits you are entitled to. If the ex-employer was a blue chip Company or public sector, there may be a right to take the full retirement benefit five years early without major reductions for early payment. If that's in the scheme rukes, taking advantage of it would seem in your financial interest.

[EthicsGradient]

On the subject of DB schemes - does anyone know what happens if the anticipated pension is upgraded by RPI each year, and the RPI goes down (as it did in 2009)? Do anticipated pensions go down too, or do they stay the same?

[DrFfybes]

55:
Pension of £2,895.17
Lump Sum of £9,710.42

60:
Pension of £3,656.16
Lump Sum of £10,566.29

65:
Pension of £3,692.02
Lump Sum of £10,566.29

I'm confused as to why the increase between 55-60 is nowhere close to replicated between 60-65? Surely on the basis of the above everyone would chose either 55 or 60 - no one would choose 65!?

There is something wrong with those figures, possibly with their calculator.

The giveaway is that the lump sum does not change between 60 and 65. The lump sum is usually a multiple of the annual pension, although this alters if the pension scheme changes, although as you've been deferred since 2008 then it is likely the TFLS is n times annual pension.

There should/could also be options for altering the lump sum amount in return for a different annual pension.

Paul

[the0ni0nking]

The lump sum changes if I were to take the maximum as opposed to the bog standard but not by much. (I've snipped the bit from the statement but still haven't worked out how to post images).

The figures for the bog standard lump sum are the same at 60 or 65 as I did do a number of double takes before posting initially.

I've downloaded the statement for my own records if they have messed something up.

[tjh290633]

On the subject of DB schemes - does anyone know what happens if the anticipated pension is upgraded by RPI each year, and the RPI goes down (as it did in 2009)? Do anticipated pensions go down too, or do they stay the same?

What happened with my annuity was that the payments stayed the same when the RPI fell, but resumed being linked in the following year. For example, if the RPI went 100, 102, 100, 103 the payments went 100, 102, 102, 103. Because the increases in payments were limited to 5%, when a fall occurred then the increase was more than 5%, the rise in the pension was limited to 5%.

Whether DB schemes do likewise, I cannot say, as mine in teases by 3% annually, but the GMP rises according to inflation. You may find the the GMP portion of your pension is covered by different rules.

TJH

[SPURLEY]

On the subject of DB schemes - does anyone know what happens if the anticipated pension is upgraded by RPI each year, and the RPI goes down (as it did in 2009)? Do anticipated pensions go down too, or do they stay the same?
A work friend of mine -- 13 years older and we were / are in the same DB scheme told me that we receive an increase equal to RPI rate from the previous September . The pension increases on the 1st of January . He did tell me that one year because the RPI was zero the pension did not get an increase . I started drawing mine 4 years ago and am happy with the increases I have received . Robert

[DrFfybes]

The lump sum changes if I were to take the maximum as opposed to the bog standard but not by much. (I've snipped the bit from the statement but still haven't worked out how to post images).

The figures for the bog standard lump sum are the same at 60 or 65 as I did do a number of double takes before posting initially.

I've downloaded the statement for my own records if they have messed something up.

You need to refer to your scheme's documentation. DB schemes will have a list of reductions eg https://www.lgpsmember.org/your-pension ... r-pension/ which show the current (they change regularly) reduction for taking it before your NRD. On your scheme the NRD appears to be your 60th birthday, if you are female it might say it is age 60 if you left before the increase for women's NRD, as suggested by the lump sum not moving. I have a really old USS one I left circa 1990 that apparently has a NRD of age 60.

The figures in the illustration are at Today's prices - they ignore inflation, and vary purely on the percentage terms as in the table. Hence the difference between age 55 and 60 is a 20.9% reduction, eerily similar to the reduction for taking an LGPS pension 5 years early I suspect there is a clause in the booklet somewhere detailing "Deferring beyond NRD", but IME the online estimators don't cope well with this scenario - when we looked at MrsF's illustrations a few years ago her pension and lump sum actually decreased if she worked past age 65.

Paul

[the0ni0nking]

I appear to have worked out how to post images (first time in imgur didn't work but ImgBB did and so to save me typing all the numbers out, this is a snip of the letter addressed to me:



Am assuming I'm allowed to post it as it's in a letter directed to me from the pension provider.

[DrFfybes]

The lump sum/pension variation is the fairly standard £12 of LS for each £1pa reduction in pension.

A larger lump sum needs to generate an index linked 8.3% to keep pace with the extra pension, and your personal and tax circumstances will make a difference.

Did you find out your Normal Retirement Age? My money is still on the old system getting confused and not incrementing beyond age 60 and a manual calc from the Pension Team will be different.

[the0ni0nking]

The lump sum/pension variation is the fairly standard £12 of LS for each £1pa reduction in pension.

Yes - indeed elsewhere on the pension statement it says exactly that.

A larger lump sum needs to generate an index linked 8.3% to keep pace with the extra pension, and your personal and tax circumstances will make a difference.

Did you find out your Normal Retirement Age? My money is still on the old system getting confused and not incrementing beyond age 60 and a manual calc from the Pension Team will be different.

The only references I can see on any paperwork talk about "Normal Pension Age" or "Normal Payment Date" which both are at the aged 65 level. So in my mind it would work the calculations back from that. Is that semantics or something fundamentally different to "Normal Retirement Age".

All my recollections were that my retirement age was 65 but that I could take it earlier albeit reduced. Not that it's of any meaningful value at the minute as its more than 10 years away before I hit 55 and who knows what the world will look like then!

But it's not like the figures I've got are from an online calculator - they are there in black and white on my annual benefit statement (which they helpfully no longer send out and so I had to download it after logging in on the web).

NB - it is a local government pension scheme

[Alaric]

NB - it is a local government pension scheme

Is this perhaps some equality fudge? Female levaers would have beeen able to take their calculated entitkements at age 60. So to "equalise", offer male leavers the same. I think they are in effect offering you a gift of five years of pension payment between age 60 and 65. No wonder local authorities are challenged for cash.