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Post by bracknellboy on Jul 25, 2021 17:48:26 GMT
Wondering if any one can shed light on the topic of ERDFs as applied to DB pensions, given that a quick check on the web has not been helpful. I am either not thinking clearly, my original understanding was wrong, or perhaps online quotation from my deferred benefit management company is not correct.
I have an NRD of 60 on my DB scheme. Am considering the merits of taking it earlier. I thought that ERDFs were fairly straightforward. for example, if I had a £10k pension benefit, and I wanted to take it early, a fixed ERDF would be applied for each year (or month in fact but keeping it simple) it was taken early. So if the annual ERDF was 5%, then taking it 12 months early would lead to a reduction of £500 pa, 24 months early would be reduction of £1000 pa, 36 months early would be £1500 pa. (And for x months, same thing but working on x/12ths of the ERDF). And I thought this was universal, and effectively by law.
However this is not what I am seeing based on my online quote generation i.e. I'm not seeing a straight line reduction.
Anyone point me to anything obvious I might be doing wrong ?
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daveb
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Post by daveb on Jul 25, 2021 18:35:15 GMT
Is it the same for all DB schemes? You might find some info specific to your one? But my understanding is that the discount is calculated by actuaries to be "fair" to all.
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corto
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Post by corto on Jul 25, 2021 19:00:27 GMT
You may need to take accrual into account that doesn't work for the years you take early any more.
Age dependent death rates may be a factor, too. Why not call your pension scheme?
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Post by Ace on Jul 25, 2021 20:51:15 GMT
One of my DB pensions had no early reduction if the pension was started after age 55 (even though the normal retirement age was 60). There was a reduction factor for each year before age 55. It was a no-brainer to take the pension at age 55. There was a small disadvantage in that the increase per year while in deferment was a bit higher than the increase per year when in payment.
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hazellend
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Post by hazellend on Jul 25, 2021 21:35:41 GMT
5% is roughly the normal for actuarial reduction.
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Post by bernythedolt on Jul 26, 2021 0:21:13 GMT
My scheme quoted "approximately 5%" reduction for every year you went early, but it was never precisely linear. I left two years early, but lived off savings and deferred my pension to age 60 because I didn't care for the reduction, even though it's probably fair actuarially. One of my better decisions - I never once regretted those extra two years of freedom... in fact I wish I'd gone three years early! If you can afford it, I would wholeheartedly recommend! If your quotes are wildly different from the ~5% pa deduction you were expecting, bracknellboy, could that be explained by the additional service you would be accruing in one of the cases? By which I mean, if quote A assumed leaving two years early, and quote B one year early, quote A has to also be based on one less year of service, so would naturally appear less generous. Not only has it suffered a 10% reduction, it was based on a smaller figure to begin with, owing to one less year of service accrual. Just a thought, and apologies if you've taken this into account. |
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Post by bracknellboy on Jul 26, 2021 8:31:18 GMT
Thanks for comments so far. There have been some comments about possible taking into account future accrurals: to be clear, I'm a deferred member of the scheme (not been with the company for 21 years). Re-reading I had not made that clear.
The 5% I used in my example was an entirely made up number (though one I expected to be a roughly right ball park figure): it was purely to illustrate that I had expected the impact to be linear: i.e. 2 years early = 2x reduction of 1 year early etc.
My reference to applying to all was intended to refer to the use of a straightline number regardless of how early, rather than an across the board %age: that I know can vary across schemes (albeit it is required to be actuarially fair I believe, as others have mentioned).
I am over 55: for non public sector pensions that is the lower legal limit you can take a pension anyway without big tax implications (other than under exceptional circumstances such as pre-existing life shortening medical conditions).
As for the numbers: taking 1 year early is showing reduction of around 6.2% (which is high: I know that in another scheme I'm aware of through my last employer the most recent ERDF was reduced to 3.7% pa recently). However at 4 years early the rate comes out at 4.8% [assuming I've correctly calculated the %ages from the absolute numbers].
I'll look to call the firm that is managing the scheme in due course, but I'm aware that "due to Covid" they are prioritising certain things so I may find it 'takes some time'.
I was looking to get some fairly accurate ball park numbers without talking to them first so I could just simply model whether it is worth me taking the pension early or not.
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Post by bracknellboy on Jul 26, 2021 8:37:10 GMT
My scheme quoted "approximately 5%" reduction for every year you went early, but it was never precisely linear. I left two years early, but lived off savings and deferred my pension to age 60 because I didn't care for the reduction, even though it's probably fair actuarially. One of my better decisions - I never once regretted those extra two years of freedom... in fact I wish I'd gone three years early! If you can afford it, I would wholeheartedly recommend! If your quotes are wildly different from the ~5% pa deduction you were expecting, bracknellboy , could that be explained by the additional service you would be accruing in one of the cases? By which I mean, if quote A assumed leaving two years early, and quote B one year early, quote A has to also be based on one less year of service, so would naturally appear less generous. Not only has it suffered a 10% reduction, it was based on a smaller figure to begin with, owing to one less year of service accrual. Just a thought, and apologies if you've taken this into account. Yes I've already stopped work back in Feb. The pension here is in fact a deferred DB pension scheme from +20 years ago. I don't actually need to take the income, and previously my gut was to possibly leave it until later to maximise the absolute value of an inflation protected income element. However, I'd like to "model" that (get a ssheet out), particularly as the current expectation is that the Personal Tax allowance is going to now be frozen for a few years: again my gut tells me that changes the landscape a bit as the tax allowance will be worth more in real terms now and will decrease (in real terms) over the next 3-4 years.
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Post by Ace on Jul 26, 2021 9:05:09 GMT
My scheme quoted "approximately 5%" reduction for every year you went early, but it was never precisely linear. I left two years early, but lived off savings and deferred my pension to age 60 because I didn't care for the reduction, even though it's probably fair actuarially. One of my better decisions - I never once regretted those extra two years of freedom... in fact I wish I'd gone three years early! If you can afford it, I would wholeheartedly recommend! If your quotes are wildly different from the ~5% pa deduction you were expecting, bracknellboy , could that be explained by the additional service you would be accruing in one of the cases? By which I mean, if quote A assumed leaving two years early, and quote B one year early, quote A has to also be based on one less year of service, so would naturally appear less generous. Not only has it suffered a 10% reduction, it was based on a smaller figure to begin with, owing to one less year of service accrual. Just a thought, and apologies if you've taken this into account. Yes I've already stopped work back in Feb. The pension here is in fact a deferred DB pension scheme from +20 years ago. I don't actually need to take the income, and previously my gut was to possibly leave it until later to maximise the absolute value of an inflation protected income element. However, I'd like to "model" that (get a ssheet out), particularly as the current expectation is that the Personal Tax allowance is going to now be frozen for a few years: again my gut tells me that changes the landscape a bit as the tax allowance will be worth more in real terms now and will decrease (in real terms) over the next 3-4 years. I modeled my 3 DB pension schemes. One of them was massively advantageous to take early, especially as I would pay no tax on the early years, so I started that one at age 55. The other two largely depended on how long I would live. I would break even on them around the age of 78. If i died earlier than that it would have been best to take them early. It obviously depended on a few other assumptions like future tax rates, inflation and other income, but my mortality was the main driver. I decided not to take them early, which is unusually optimistic for me.
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agent69
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Post by agent69 on Jul 26, 2021 9:13:44 GMT
I was thinking of taking my DB pension early, but was put off by the >6% reduction per year. Instead decided to fund my early retirement using P2P profits, premium bond winnings, prize money from golf competitions, my savings.
Currently looking at whether to take a tax free lump sum when I reach normal retirement age. Being offered a commutation rate of 18, which I believe is quite good.
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Balder
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Post by Balder on Jul 26, 2021 9:21:23 GMT
Has anyone looked at the option of getting a transfer value from your DB pension to transfer into a sipp and then look at the flexibility that would then give you for drawdown so you can compare?
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Post by Ace on Jul 26, 2021 10:11:17 GMT
I was thinking of taking my DB pension early, but was put off by the >6% reduction per year. Instead decided to fund my early retirement using P2P profits, premium bond winnings, prize money from golf competitions, my savings.
Currently looking at whether to take a tax free lump sum when I reach normal retirement age. Being offered a commutation rate of 18, which I believe is quite good.
Commutation rate on my largest DB pension is currently 14.6 at age 65, no idea how typical that is, but it makes 18 sound like good value. On the other hand, the same factor is used for converting AVCs to pension, so it's better for me that way round.
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Post by bernythedolt on Jul 26, 2021 19:19:58 GMT
I was thinking of taking my DB pension early, but was put off by the >6% reduction per year. Instead decided to fund my early retirement using P2P profits, premium bond winnings, prize money from golf competitions, my savings.
Currently looking at whether to take a tax free lump sum when I reach normal retirement age. Being offered a commutation rate of 18, which I believe is quite good.
18 is much better than the crummy 12 that my Civil Service scheme was offering in 2013 when I left. In fact, they were so heavily promoting the "benefits" of commuting some pension into additional lump sum at that crummy rate of 12-to-1 that it made me suspicious.... yet plenty of people were taking them up! I decided that if my Civil Service employer was that keen to promote it, it must be a rubbish deal, so I did the exact opposite and "inversely commuted" my entire lump sum into additional pension. That was a great decision, because my lump sum would right now be languishing somewhere in a cash account, losing value by earning 1%, instead of which I'm getting an extra pension which goes up with CPI every year, plus widow's benefit of 50% when I croak it. The idea of inverse commutation - cashing in some lump sum in exchange for additional pension - is so little known about that I had to educate my pension provider (outsourced to Capita at the time) all about it. It was a provision in my scheme rules, but so little used that my pension administrators weren't even aware of it. I mention it here in case it's an option you may wish to explore.
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agent69
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Post by agent69 on Jul 27, 2021 9:09:57 GMT
I was thinking of taking my DB pension early, but was put off by the >6% reduction per year. Instead decided to fund my early retirement using P2P profits, premium bond winnings, prize money from golf competitions, my savings.
Currently looking at whether to take a tax free lump sum when I reach normal retirement age. Being offered a commutation rate of 18, which I believe is quite good.
18 is much better than the crummy 12 that my Civil Service scheme was offering in 2013 when I left. In fact, they were so heavily promoting the "benefits" of commuting some pension into additional lump sum at that crummy rate of 12-to-1 that it made me suspicious.... yet plenty of people were taking them up! I decided that if my Civil Service employer was that keen to promote it, it must be a rubbish deal, so I did the exact opposite and "inversely commuted" my entire lump sum into additional pension. That was a great decision, because my lump sum would right now be languishing somewhere in a cash account, losing value by earning 1%, instead of which I'm getting an extra pension which goes up with CPI every year, plus widow's benefit of 50% when I croak it. The idea of inverse commutation - cashing in some lump sum in exchange for additional pension - is so little known about that I had to educate my pension provider (outsourced to Capita at the time) all about it. It was a provision in my scheme rules, but so little used that my pension administrators weren't even aware of it. I mention it here in case it's an option you may wish to explore. I believe commutation rates in the public sector are always 'cr*p'. I assume this is to offset the fact that the pensions themselves are big and juicy.
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alanh
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Post by alanh on Jul 27, 2021 10:47:27 GMT
Has anyone looked at the option of getting a transfer value from your DB pension to transfer into a sipp and then look at the flexibility that would then give you for drawdown so you can compare? Be careful if you are doing this. I know people who were offered 25x their DB pension and others who were offered upwards of 60x - there appeared to be an opening offer that was lowballed and then subject to pretty heavy upwards negotiation. There is certainly plenty of scope to negotiate/get shafted in this process.
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