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Deferred Poverty


lovelyboy
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lovelyboy

Like many on here I have a couple of deferred pensions and, while not big bucks, I will rely on the income along with my SIPP and state pension in retirement. Being index linked; they are inflation-proof so I've never really had to give it much thought.

But I wonder how many of you have read the small print. It seems both my deferred pensions are inflation-proof up to maximum CPI = 5%. In other words, if inflation rises above 5% it does what inflation does and eats away at the real value of your deferred pension. I believe this 5% rule is quite typical of many final salary pension schemes.

The prospect of CPI going above 5% for a period of several years has now become a very real possibility and while I'm not predicting full on Venezuela style hyper-inflation, I thought I'd look back at what UK inflation in the seventies would have done to the value of my deferred pensions given the 5% rule I mentioned above.

Here's the data. Year in the left column, rate of inflation in the centre column and on the right column; what would happen to £100 of pension from 1968 to 1982. In just 15 years your pension would have lost two thirds of it's value. Can anyone see a flaw in my reckoning? Has anyone thought about this before and what have you done/intend to do. Should we act now before regulators pull up the drawbridge. I believe there are already obstacles in place to those wishing to opt out of final salary schemes. Does this apply to deferred pensions too?

The golden rule is never opt out of a final salary pension scheme. Is this still true in an era of high inflation?


1982                   8.60%              £34.53
1981                  11.88%              £35.82
1980                 17.97%               £38.47
1979                 13.42%              £44.20
1978                   8.26%              £48.26
1977                  15.84%             £49.89
1976                  16.56%             £55.95 
1975                  24.21%             £63.26
1974                  16.04%             £78.30
1973                   9.20%              £88.02
1972                   7.07%               £91.88
1971                   9.44%              £93.82
1970                   6.37%              £98.18
1969                  5.45%               £99.55
1968                  4.70%               £100

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Axeman123
1 hour ago, lovelyboy said:

1972                   7.07%               £91.88
1971                   9.44%              £93.82
1970                   6.37%              £98.18
1969                  5.45%               £99.55
1968                  4.70%               £100

Imagine the paradigm shift if you were watching this play out with your own pension income between 1968- 1972.

1968 - all good

1969/70 - thats irritating, but inconsequential

1971/72- Christ that stings

...and you would have a decade long horror movie still to come!

Edited by Axeman123
seperate lines for clarity
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46 minutes ago, lovelyboy said:

The golden rule is never opt out of a final salary pension scheme. Is this still true in an era of high inflation?

Yeah those numbers are worrying, especially when you consider how manipulated the CPI basket is.  True inflation for essentials will likely be far higher than stated. 

My final salary pension is capped at 5% also.  I've been trying to transfer out but it's proving impossible - thread below.  So even if it does make sense to transfer, you may not be able to. 

My provider also reserves the right to change the inflation method used with agreement from the trust.

Key considerations for transferring I think is ability to outperform inflation via investment and also how generous the transfer value is vs expected benefits.

As always it's a judgement call to a certain extent but having a choice would be nice.

 

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SpectrumFX

I've worried about this scenario for several years. I used to be in the USS pension, which has an inflation cap. I changed employer to one who offered the local government scheme purely because that doesn't have a cap.

I then transferred the USS pot over. It was done on a cash basis because the USS has left the public sector pension club but is much easier to do - as it's DB to DB - than transferring out to a DC scheme.

There are a few other DB schemes without a inflation cap, but I think these days they're all basically government schemes now. And to transfer into one you'd have to get a job with an employer offering such a scheme.

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Axeman123
14 minutes ago, SpectrumFX said:

I've worried about this scenario for several years. I used to be in the USS pension, which has an inflation cap. I changed employer to one who offered the local government scheme purely because that doesn't have a cap.

I then transferred the USS pot over. It was done on a cash basis because the USS has left the public sector pension club but is much easier to do - as it's DB to DB - than transferring out to a DC scheme.

There are a few other DB schemes without a inflation cap, but I think these days they're all basically government schemes now. And to transfer into one you'd have to get a job with an employer offering such a scheme.

Surely in a time of rampant inflation ways would be found to impose a cap, to "protect" the viability of the scheme etc?

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SpectrumFX
1 hour ago, Axeman123 said:

Surely in a time of rampant inflation ways would be found to impose a cap, to "protect" the viability of the scheme etc?

Yes, there's no getting away from the time value of money. Any deferred payment is always at risk.

But with the government pension schemes they've got to get the changes past all the public sector unions, which offers some defense. And I'll take a risk of debasement over the certainty of it any chance I can get.

 

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lovelyboy

Now I'm really starting to worry. I heard new rules made it difficult to transfer out of DB but reading the thread linked to by @RWJ it seems a lot more difficult than I thought. On the thread @JMDrecommended going through 'Sipp Club'. Has anyone else tried Sipp Club?

This is the type of bullshit that happens when greedy idiots are constantly bailed out of taking responsibility for their decisions. It seems financial advisors are shit scared to offer anyone, even the financially astute, any form of advice.

 

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@lovelyboy

I've started the process with SIPP Club, having completed the first online form.  Now the 2nd more detailed form to complete.

The cost is fairly eye-watering at a minimum £6k for my transfer value of £140k.  That would be hard to stomach if they advise against.  There's also a fee at each stage, which is laid out on their website.

Under FCA guidance you can be classed as an 'insistent client' should they rule against a transfer and you decide to go ahead anyway but not every firm will entertain this.  If I was putting down £6k I'd want to know upfront they'd honour that, otherwise no go.

I'm in two minds.  Tempted to take the inflation adjustments for a few years then try again when age is more on my side and hopefully the process is easier and less costly.  See what state the financial system is in by then.  This isn't my main pension so sitting on my hands won't be a disaster.

It's a bullshit situation for sure.

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lovelyboy

My transfer value is similar to yours so £6K fee to get what is already mine feels like a rip off.

I'm not sure how the 'insistent client' rule works. Surely it's best to go for the cheapest IFA, if only just to get a refusal. Then you can tell the FCA you've received the advice, they said no, but I'm an 'insistent client' because...I'm unemployed, I've got 5 years to live, I'm homeless... whatever you need to tell them.

Handing over £6K with no guarantee of success sounds risky. Briefly looking at their website SIPP Club just look like a middleman.

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10 hours ago, lovelyboy said:

Like many on here I have a couple of deferred pensions and, while not big bucks, I will rely on the income along with my SIPP and state pension in retirement. Being index linked; they are inflation-proof so I've never really had to give it much thought.

But I wonder how many of you have read the small print. It seems both my deferred pensions are inflation-proof up to maximum CPI = 5%. In other words, if inflation rises above 5% it does what inflation does and eats away at the real value of your deferred pension. I believe this 5% rule is quite typical of many final salary pension schemes.

The prospect of CPI going above 5% for a period of several years has now become a very real possibility and while I'm not predicting full on Venezuela style hyper-inflation, I thought I'd look back at what UK inflation in the seventies would have done to the value of my deferred pensions given the 5% rule I mentioned above.

Here's the data. Year in the left column, rate of inflation in the centre column and on the right column; what would happen to £100 of pension from 1968 to 1982. In just 15 years your pension would have lost two thirds of it's value. Can anyone see a flaw in my reckoning? Has anyone thought about this before and what have you done/intend to do. Should we act now before regulators pull up the drawbridge. I believe there are already obstacles in place to those wishing to opt out of final salary schemes. Does this apply to deferred pensions too?

The golden rule is never opt out of a final salary pension scheme. Is this still true in an era of high inflation?


1982                   8.60%              £34.53
1981                  11.88%              £35.82
1980                 17.97%               £38.47
1979                 13.42%              £44.20
1978                   8.26%              £48.26
1977                  15.84%             £49.89
1976                  16.56%             £55.95 
1975                  24.21%             £63.26
1974                  16.04%             £78.30
1973                   9.20%              £88.02
1972                   7.07%               £91.88
1971                   9.44%              £93.82
1970                   6.37%              £98.18
1969                  5.45%               £99.55
1968                  4.70%               £100

Indeed.

But bear in mind you need spend much less money after 80 -unless you end up in southern nursing home.

Outside if the public sector, DB haven't been in tge private sector fir over 20 years.

Public sector really has a huge deal to catch up. Both much much longer time to accrue benefits but removing of the gold plate - limit spouse payouts to 5 years after death.

 

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SpectrumFX
18 minutes ago, spygirl said:

Indeed.

But bear in mind you need spend much less money after 80 -unless you end up in southern nursing home.

Outside if the public sector, DB haven't been in tge private sector fir over 20 years.

Public sector really has a huge deal to catch up. Both much much longer time to accrue benefits but removing of the gold plate - limit spouse payouts to 5 years after death.

 

When the local authorities went from final salary to average salary they also changed the accrual rate from 1/80 to 1/49.

Fucking mental really.

xD

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1 minute ago, SpectrumFX said:

When the local authorities went from final salary to average salary they also changed the accrual rate from 1/80 to 1/49.

Fucking mental really.

xD

LA pensions are going to be test bed.

One, everyone hates LA.

Two, they are fucking useless- see properdee investing.

Three, they are meant to be funded.

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One percent
4 minutes ago, spygirl said:

LA pensions are going to be test bed.

One, everyone hates LA.

Two, they are fucking useless- see properdee investing.

Three, they are meant to be funded.

They are funded. Directly from your council tax. You don’t really think it costs that much to empty the bins and occasionally sweep the streets.  :)

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lovelyboy

The real advantage of DB over DC in the private sector was, as your career progressed and you got promoted, your pension increased in line with your earnings. But DB hasn't existed in the private sector for the last 20 years so all DBs have effectively become deferred pensions. Deferred pensions are not actually a great deal as they usually increase with inflation and not with stock market returns like DCs. It's a bit ridiculous that the regulator feels we must protect the 'gold standard' of deferred pensions.

The public sector is different. A nurse or school teacher can move to any part of the country and can have several career changes and promotions while all the time staying within the same pension scheme. For a public sector worker, DB truly does what it says on the tin.

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3 minutes ago, One percent said:

They are funded. Directly from your council tax. You don’t really think it costs that much to empty the bins and occasionally sweep the streets.  :)

They are meant to be funded.

They are probably only 50% tops.

 

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Virgil Caine
4 hours ago, spygirl said:

Indeed.

But bear in mind you need spend much less money after 80 -unless you end up in southern nursing home.

Outside if the public sector, DB haven't been in tge private sector fir over 20 years.

Public sector really has a huge deal to catch up. Both much much longer time to accrue benefits but removing of the gold plate - limit spouse payouts to 5 years after death.

 

There are some DC schemes available in the public sector including the Civil Service but the government don’t actively promote them because they are required to put real cash into those schemes rather than empty IOUs. 

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Frank Hovis

I am very much hoping that this current state of affairs where you can't cough without paying a pension advisor £5k for the privilege is recognised for the nonsense it is within the next ten years as that's when I will be wanting to do it.

Or at least a caveat that if you can demonstrate £Xk in existing invested assets that you are trusted to behave like a grown up with your pension.

Mind by then interest rates and therefore annuities might be worthwhile again.

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King Penda

I’d be more worried about a means tested state benifits they say your entitlement is say 180 a week ,I’d not be surprised to find out they don’t simply mean from all pensions combined 

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One percent
21 minutes ago, King Penda said:

I’d be more worried about a means tested state benifits they say your entitlement is say 180 a week ,I’d not be surprised to find out they don’t simply mean from all pensions combined 

This, it’s coming without a doubt. 

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DurhamBorn
2 hours ago, One percent said:

This, it’s coming without a doubt. 

No chance they ever means test the state pension.None.

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One percent
6 minutes ago, DurhamBorn said:

No chance they ever means test the state pension.None.

Why don’t you think so? 

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Axeman123
12 minutes ago, DurhamBorn said:

No chance they ever means test the state pension.None.

Could they not acheive something very similar, by adding means tested top ups while allowing the base pension to be massively eroded by inflation?

A top up for the poorest? Hard to argue. The pension falling in value, but the poorest pensioners actually being better off once you include the top up? Standad smoke and mirrors stuff. A political pledge to never means test the basic state pension? Easy to honour subject to the above.

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One percent
30 minutes ago, Axeman123 said:

Could they not acheive something very similar, by adding means tested top ups while allowing the base pension to be massively eroded by inflation?

A top up for the poorest? Hard to argue. The pension falling in value, but the poorest pensioners actually being better off once you include the top up? Standad smoke and mirrors stuff. A political pledge to never means test the basic state pension? Easy to honour subject to the above.

They already do that with pension credits. My mum had a very small (sub 500 a month) pension inherited from my dad, her own house and about 25k in savings.  Her cousin who lived round the corner had just the state pension and a council house. Guess which one had more disposable income. 

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On 01/11/2021 at 21:28, spygirl said:

LA pensions are going to be test bed.

One, everyone hates LA.

Two, they are fucking useless- see properdee investing.

Three, they are meant to be funded.

All threads lead to one .....

USS striking. Again.

https://www.bbc.co.uk/news/education-59171771

HYS - More n more people ca nse that the problem is -

People are living longer. Public sector pensions were set up when most people died 5 to 10 years after retirement.

The private sector woke up to this 30 years ago and made pensions sustainable - they suck, but they reflect reality.

If you want keep your elevated benefits, you have to pay in more. My grandmother was teacher and had a 40 year retirement on a final salary pension - not sustainable

 

Unhappy with Biden and taxes, New Jersey’s suburban voters ‘snap back’

Democrat Phil Murphy won state’s governorship by slim margin after residents switched allegiance

https://www.ft.com/content/2744b666-52c9-4998-b8d6-76adfe896190

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https://www.ft.com/content/2744b666-52c9-4998-b8d6-76adfe896190

“I’m tired of the Democrats,” said Ray, 77, who — like many in this part of northern New Jersey — fumed about the state’s notoriously high property taxes. He pays $12,000 a year.

 

Millions of UK retirement savers blocked from accessing pensions at 55

Treasury in surprise closure of window for savers to beat two-year rise in minimum age for eligibility

https://www.ft.com/content/2a6ee87e-d330-4c12-adad-cc6dcd345673

Comments -
 
 
“The Treasury added that the increase to 57 would not apply to members of certain uniformed public service schemes”
Surprised pikachu face
 
 
 
 
 
 
 
(Edited)
 
 
I’d love to see the cost of uniformed public service pensions as a percentage of average lifetime earnings - it must be close to 100%.  I don’t think our ‘underpaid’ public servants have any idea of how much they are really paid.
 
 
 
 
 
 
 
(Edited)
 
 
Yep.
 
Cost of standard civil service DB is at least 35+%.
 
Armed forces, police, fire brigade etc, with their super rapid accrual rate and super early NRA must be nearer 70%.  And maybe even 100% as you suggest.
 
They don't even realise how much their pensions are worth, not helped by HMRC massively under valuing and under taxing DB, 
 
Enables the UK public sector to continue feeling incredibly hard done by and sorry for itself. 
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