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Final Salary Pension - Advice On Deductive Component
11 Answers
The normal retirement age where I work is 65. I am being made redundant in June. I have 18 years service and at 56 can draw my final salary pension, and may well need to.
My pension forecast shows that at age 65 a deductive component (DC) is applied which means it reduces by £281 per month circa £3,300.00 annually.
When this pension scheme was set up, the state retirement age for all men was 65, which lessened the impact of this deduction - a deduction I still don't really understand. However, as we now all know, there is a rolling programme of increasing retirement age and in my case I draw my state pension at age 66. This means that for a whole year I have to get by on a much reduced company pension.
From googling this subject I have read that some pension schemes have addressed this situation, by mirroring these government changes, so that the DC takes effect at the state pension age - to ensure no shortfall. Has anyone had experience of this?
In respect to the DC I have been told that this is related to what was once called serps, and that this shortfall is made good by the government. I contracted out of serps for several years and in my state pension forecast it states that the amount I get in respect to serps referred to as "Contracted Out Pension Equivalent (COPE)" is £31.50 and which will be paid either by my work or private pension. Firstly this is less than half of the shortfall, plus it contradicts what my employer is telling me about it being the government that makes up the amount lost by the DC. Totally confused. Where is the best place to get advice from? Many thanks
My pension forecast shows that at age 65 a deductive component (DC) is applied which means it reduces by £281 per month circa £3,300.00 annually.
When this pension scheme was set up, the state retirement age for all men was 65, which lessened the impact of this deduction - a deduction I still don't really understand. However, as we now all know, there is a rolling programme of increasing retirement age and in my case I draw my state pension at age 66. This means that for a whole year I have to get by on a much reduced company pension.
From googling this subject I have read that some pension schemes have addressed this situation, by mirroring these government changes, so that the DC takes effect at the state pension age - to ensure no shortfall. Has anyone had experience of this?
In respect to the DC I have been told that this is related to what was once called serps, and that this shortfall is made good by the government. I contracted out of serps for several years and in my state pension forecast it states that the amount I get in respect to serps referred to as "Contracted Out Pension Equivalent (COPE)" is £31.50 and which will be paid either by my work or private pension. Firstly this is less than half of the shortfall, plus it contradicts what my employer is telling me about it being the government that makes up the amount lost by the DC. Totally confused. Where is the best place to get advice from? Many thanks
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bit of a long post
is your question:
why dont I have as big a pension as I thought it might be once ?
you joined a scheme ( without much choice ) and the benefits were set out by the pension trustees at joining. You can hold them to that in contract
and you pays your money and then at time X you get the benefits they promised you first time round
yes they might actually change benefits - up to around 1985 it was always upwards so everyone said yes thanks and went on contributing
now it usually is to save money and there are special rules for that which dont concern us here - they usually have to close the old generous scheme and run a second one with reduced benefits in actual fact
are they under a duty to change their rules to ameliorate mr browns raid on pension funds in 1997 ? No I dont think they are especially as it was unforeseeable
who can you ask ?
Yur union shoud have a pension officer
is your question:
why dont I have as big a pension as I thought it might be once ?
you joined a scheme ( without much choice ) and the benefits were set out by the pension trustees at joining. You can hold them to that in contract
and you pays your money and then at time X you get the benefits they promised you first time round
yes they might actually change benefits - up to around 1985 it was always upwards so everyone said yes thanks and went on contributing
now it usually is to save money and there are special rules for that which dont concern us here - they usually have to close the old generous scheme and run a second one with reduced benefits in actual fact
are they under a duty to change their rules to ameliorate mr browns raid on pension funds in 1997 ? No I dont think they are especially as it was unforeseeable
who can you ask ?
Yur union shoud have a pension officer
So, as I understand your post, the pension scheme's rules were always to apply a reduction based on the difference between the scheme's retirement age of 65 and your preferred retirement date of 56. All my pension schemes carried an actuarial deduction for drawing it early on the basis that you'd be claiming it for longer-in your case maybe 30 years instead of 20.
In your case I am not sure what this DC reduction is. Is there also an actuarial reduction or is it simply another name for effectively the same thing.
Many of us will have to wait until age 66 (or more for us young uns) so you are not being singled out there, and the good news is that even though you have to wait another year you can now expect to draw the state pension for at least as long as you might have expected when you joined the state pension scheme because of increased life expectancy
In your case I am not sure what this DC reduction is. Is there also an actuarial reduction or is it simply another name for effectively the same thing.
Many of us will have to wait until age 66 (or more for us young uns) so you are not being singled out there, and the good news is that even though you have to wait another year you can now expect to draw the state pension for at least as long as you might have expected when you joined the state pension scheme because of increased life expectancy
Hmmm... when I first started saving into a pension I expected to live to over 100; seems unlikely now. Excuses used to avoid paying out at the agreed start time shouldn't be allowed. Average life span didn't change overnight.
Beware drawing "early" as, if my experience is anything to go by, by the time you draw the graphs comparing normal and contemplated start date, you'll conclude that the actuary is trying to rob you blind. In my case before 65 I'd have already been worse off.
Beware drawing "early" as, if my experience is anything to go by, by the time you draw the graphs comparing normal and contemplated start date, you'll conclude that the actuary is trying to rob you blind. In my case before 65 I'd have already been worse off.
When one is lucky enough to have a Final Salary Pension (Defined Benefits, DB) it provides for a contractual obligation by the employer to provide a future financial benefit based on a series of rules. Pension trustees run the scheme, advised by actuaries who financially model the assets (of the scheme) versus the future liabilities.
Why tell you something you probably already know? - because trustees are under no obligation to change the contract obligation (say, when Government increases state retirement age from 65 to 66) - but some pension trustees in similar schemes have done so - according to your research. Maybe they have also downgraded part of the benefit in order to fund it - who knows, but I don't see how it changes anything for you.
The second thrust of your complaint seems to be concerned with comparing your COPE to your deductive component (DC). But you are comparing eggs with bananas, and unsurprisingly, one is bent whilst the other isn't yellow. The DC represents a figure derived from the reduced amount of employment years that you will not pay into the scheme (9 in your case), it does not directly relate to the value of the COPE. As far as I know (and I know less about DB schemes these days as I don't have one any more) they have to show that the benefits are worth at least the bought-out element from the state scheme. That was certainly true of Defined Contribution Schemes - the more usual scheme these days.
If I was in your position, I would be spending time trying to ensure I maximised my position based on the rules I can influence. Don't know about your particular scheme, but trying to ensure you maximise the salary on which the 'final year' is based, by for example, being paid for holidays, not taking them - some schemes allow for this. I've already clocked from your earlier post that you can't tweet the figure by use of overtime. Then there's the murky business about redundancy payment - depending on circumstances it may be worthwhile paying part of the redundancy into a stand-alone pension pot - to avoid tax on it if over £30k.
Why tell you something you probably already know? - because trustees are under no obligation to change the contract obligation (say, when Government increases state retirement age from 65 to 66) - but some pension trustees in similar schemes have done so - according to your research. Maybe they have also downgraded part of the benefit in order to fund it - who knows, but I don't see how it changes anything for you.
The second thrust of your complaint seems to be concerned with comparing your COPE to your deductive component (DC). But you are comparing eggs with bananas, and unsurprisingly, one is bent whilst the other isn't yellow. The DC represents a figure derived from the reduced amount of employment years that you will not pay into the scheme (9 in your case), it does not directly relate to the value of the COPE. As far as I know (and I know less about DB schemes these days as I don't have one any more) they have to show that the benefits are worth at least the bought-out element from the state scheme. That was certainly true of Defined Contribution Schemes - the more usual scheme these days.
If I was in your position, I would be spending time trying to ensure I maximised my position based on the rules I can influence. Don't know about your particular scheme, but trying to ensure you maximise the salary on which the 'final year' is based, by for example, being paid for holidays, not taking them - some schemes allow for this. I've already clocked from your earlier post that you can't tweet the figure by use of overtime. Then there's the murky business about redundancy payment - depending on circumstances it may be worthwhile paying part of the redundancy into a stand-alone pension pot - to avoid tax on it if over £30k.
Well thanks for that. Let's see if it's any use to the OP. So many times these days one doesn't even get an acknowledgement the OP has even read the replies to these deeply technical-type questions.
So often, it seems we can't get the quality of OP any more - not that it is addressed to Countrykid, who does acknowledge..
So often, it seems we can't get the quality of OP any more - not that it is addressed to Countrykid, who does acknowledge..
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