voluntary redundancy and Enhanced Pension

[caraidalba]

Hi. I know that the MTSF for pensions changed last year, but I still find it slightly confusing so please pardon my ignorance.
I am 57 years old and have worked for Royal Mail for 28 years. I am still in the pension scheme. They are beginning to offer VR in our office, and I have thought about putting my name in. I know if I were to get out of the scheme I would probably get the 104 week offer. However, I wanted to know what would happen if I stayed in, and see what offer I would get. Under the old agreement it would have been a 6 month payment, your pension without any loss of benefits, and the pension enhanced by 2 years. But now that the MTSF has changed, I am not sure what:

"the total cost to the business does not exceed the equivalent of two year’s pensionable pay"

means for me. My intent was to go for the maximum tax free lump sum (up to £70,000) and the lower pension (about £9,500). The 6 month VR payment would have made it another £12,000 lump sum. This is what I worked out, but I don't know whether that would still be the case now.
Could someone please advice? Cheers.

[RobertT]

Any enhanced pension is calculated as 37.5% of the pension you would have got if you carried on working until 65. So if you got EVR on your 58th birthday for example, you would get 2 years and 224 days added onto your accrued pension entitlement to date. However as you rightly say, under the new MTSF agreement the cost to the business must not now exceed 2 years pay.

I’m not too sure of the exact calculations used, but I assume a laymans method of working it out would be to multiply that extra pension amount by the number of years it’s expected to be paid out plus inflation. Obviously two out of those three amounts are unknown to a large degree, so it’s not an easy thing to do.

However if you do put your name down as being interested in EVR/VR, then in due course they should provide you with a quote as to how much you’re likely to get anyway.

If the calculation is over 2 years pay then all you would get is the 104 weeks lump sum. And If you wanted to take your pension aswell in that scenario, that would be reduced for early payment at the rate of 5% per year. So again if you do that at 58, your NRA60 pension would be reduced by 10% and your NRA65 by 35%.

On a slightly separate note: I’m not too sure which figures you’re using to work out your pension entitlement and I'm not saying they are wrong. But please be aware the ones on your statement relating to your NRA65 pension are just a guestimate that assume you carry on working at current pay rates etc until you’re actually 65. If you leave before then under any circumstances, or if the scheme closes in 2018 as is expected, then those figures won’t apply.

[caraidalba]

Any enhanced pension is calculated as 37.5% of the pension you would have got if you carried on working until 65. So if you got EVR on your 58th birthday for example, you would get 2 years and 224 days added onto your accrued pension entitlement to date. However as you rightly say, under the new MTSF agreement the cost to the business must not now exceed 2 years pay.

I’m not too sure of the exact calculations used, but I assume a laymans method of working it out would be to multiply that extra pension amount by the number of years it’s expected to be paid out plus inflation. Obviously two out of those three amounts are unknown to a large degree, so it’s not an easy thing to do.

However if you do put your name down as being interested in EVR/VR, then in due course they should provide you with a quote as to how much you’re likely to get anyway.

If the calculation is over 2 years pay then all you would get is the 104 weeks lump sum. And If you wanted to take your pension aswell in that scenario, that would be reduced for early payment at the rate of 5% per year. So again if you do that at 58, your NRA60 pension would be reduced by 10% and your NRA65 by 35%.


On a slightly separate note: I’m not too sure which figures you’re using to work out your pension entitlement and I'm not saying they are wrong. But please be aware the ones on your statement relating to your NRA65 pension are just a guestimate that assume you carry on working at current pay rates etc until you’re actually 65. If you leave before then under any circumstances, or if the scheme closes in 2018 as is expected, then those figures won’t apply.

Thanks for that. I thought that if you took VR during 55-59 years and you still were in the pension scheme, you would not lose the 5% per year off the pensions (NRA60 and NRA65) but get the full amount they were due. Is that changed as well?

[RobertT]

As far as I’m aware the original MTSF options for the over 55’s were:

1) Early Voluntary Retirement(EVR) with enhanced pension plus 6 months pay

Or

2) Voluntary Redundancy(VR) with a max of 104 weeks pay for those not currently paying into the RMPP plus the option to take your pension but with the normal reductions applied

The new options are:

1) EVR with enhanced pension plus 6 months pay

Or if the overall cost equates to more than 2 years pay

2) VR with 104 weeks pay plus the option to take your pension with the normal reductions applied

I’m quite happy to be corrected but I don’t think there was ever an option to take VR plus a max of 104 weeks pay and still get an unreduced pension. The main change with the new MTSF agreement relates to the 2 years cost limit being introduced.

[caraidalba]

As far as I’m aware the original MTSF options for the over 55’s were:

1) Early Voluntary Retirement(EVR) with enhanced pension plus 6 months pay

Or

2) Voluntary Redundancy(VR) with a max of 104 weeks pay for those not currently paying into the RMPP plus the option to take your pension but with the normal reductions applied

The new options are:

1) EVR with enhanced pension plus 6 months pay

Or if the overall cost equates to more than 2 years pay

2) VR with 104 weeks pay plus the option to take your pension with the normal reductions applied

I’m quite happy to be corrected but I don’t think there was ever an option to take VR plus a max of 104 weeks pay and still get an unreduced pension. The main change with the new MTSF agreement relates to the 2 years cost limit being introduced.

No, I think you are right about still getting a reduced pension - I just checked the Pensions website, and they confirmed as such. With the extra 2 years enhanced pension, does that mean that if I being 58 say, the pension payment would be based on being 60 years old, or would it mean an additional 2 years added to my working time with Royal Mail? Thanks again.

[RobertT]

Any enhanced pension would be added onto the qualifying years you’ve already built up. So if you’ve got 28 years actual service and qualify for 2 enhanced years that would make a total of 30.

[caraidalba]

Any enhanced pension would be added onto the qualifying years you’ve already built up. So if you’ve got 28 years actual service and qualify for 2 enhanced years that would make a total of 30.

I appreciate your help.

[daveyeff]

its worth remembering that the 5% you lose for each year you take it early, is not really lost, as you are receiving your pension every month. the money you receive each month over a 12 month period replaces the loss.

[RobertT]

its worth remembering that the 5% you lose for each year you take it early, is not really lost, as you are receiving your pension every month. the money you receive each month over a 12 month period replaces the loss.

The argument for taking your pension early is that you’re getting less but for longer. Whether it works out in your favour overall will ultimately depend on how long you live.

[Tman]

It's also worth bearing in mind that it's not a 5% reduction on a part-year, ie, six months would be 2.5% for that year, etc.

[jetblack]

Look after yourself.

Eat well - don't smoke - get a dog (for the exercise (as well as the companionship)).

This way you don't only get maximum payout from the pension scheme, you also get to, well, live longer.

[daveyeff]

me and my mate took ours at 50. (just before they raised the age to 55) we both got a lump sum and have been receiving our pensions for the last 7 years. by the time we reach the NRA of 60, which is when it would have matured, we will have had more than the original lump sum that was on offer, had we have waited till 60. you also have the option to carry on paying into your pension if you take it early which is what I did giving you a further lump sum/pension.

[RobertT]

me and my mate took ours at 50. (just before they raised the age to 55) we both got a lump sum and have been receiving our pensions for the last 7 years. by the time we reach the NRA of 60, which is when it would have matured, we will have had more than the original lump sum that was on offer, had we have waited till 60.

Had you waited until 60 you’d have got a bigger lump sum and a bigger pension than you did get, and will be in a much better position to face retirement than with your heavily reduced(50%) pension.

you also have the option to carry on paying into your pension if you take it early which is what I did giving you a further lump sum/pension.

That’ll be the NRA65 bit then that’s due to close in 2018, so it won’t pay out anywhere near as much at 65 as is currently quoted on your annual statement. That’s obviously out of your control but it will be potentially compounding your original poor decision even more.

As has been said before, if you die at a relatively young age taking your pension early can be a good financial move. But nobody really knows how long they are going to live do they?

Let’s take three people with identical NRA60 pensions.

Dave’s is worth £200 per week at 60 but takes it at 50 with a 50% reduction giving him £100 per week instead. He also gets a £10,000 lump sum that’s been reduced too.
Jim takes his at 55 giving him £150 per week and a £15,000 lump sum.
But Bob takes his at 60 with no reduction giving him £200 per week along with his full £20,000 lump sum.

By the time Dave reaches 60 he’ll have received a total of £62,000, Jim will have got £54,000 but Bob won’t have had anything at all.
When 65 comes along Dave will have got £88,000, Jim £93,000 but Bob will have gone from £0 to £72,000 in just 5 years.

By 70 it’ll be Dave on £114,000, Jim on £132,000 and Bob on £124,000.
And by 80 it’s £156,000 to Dave, £210,000 to Jim, but Bob has shot right up to £228,000.

My numbers are just for example purposes and I haven’t taken income tax, inflation or any interest or growth you might make on your lump sum into account. But it goes to show how much more you’ll end up getting if you live to average age and take your pension at the correct time. It also gives you more each week to actually live on which ultimately is what a pension is all about.

And if you’re interested :
By 85 it’s Dave on £192,000, Jim on £249,000 and Bob on £280,000.
And should any of them live to 90 then Dave would have got a total of £218,000, Jim - £288,000 and Bob - £332,000.

[daveyeff]

no, we wouldn't have got a bigger lump sum had we waited til 60. as those benefits for that pension froze in 2010. as for the new pension closing/revised/etc in 2018. we'll will all have to wait and see what happens there. its being negotiated. and if it does close then that's 20quid a week rise in your pay straight away. as for it being a poor decision to take it early, well that's entirely a point of view. you could have waited until maturity to get more and die a week before it matures. my mate had 42 years on the railway, he got his pension, massive lumper, then found out 2 months later he had lung cancer and sadly passed away 3 months later. as for your projected figures. anything can happen anytime so in my view its best to get it when you can....but that is entirely my view.

[RobertT]

no, we wouldn't have got a bigger lump sum had we waited til 60. as those benefits for that pension froze in 2010.

But you took it 10 years early so a 5% per year reduction was applied.

as for the new pension closing/revised/etc in 2018. we'll will all have to wait and see what happens there. its being negotiated. and if it does close then that's 20quid a week rise in your pay straight away.

It’s almost certain to close in its current form and be replaced by a defined contribution scheme. Factoring in tax relief and PSE a £20 per week pension contribution is only actually costing you £13.60, so that’s how much extra you’d have in your pay if you opted out of the pension.

as for it being a poor decision to take it early, well that's entirely a point of view. you could have waited until maturity to get more and die a week before it matures. my mate had 42 years on the railway, he got his pension, massive lumper, then found out 2 months later he had lung cancer and sadly passed away 3 months later. as for your projected figures. anything can happen anytime so in my view its best to get it when you can....but that is entirely my view.

I don’t think it’s really down to having a different point of view, it’s more down to being realistic. Just because your mate died soon after taking his pension doesn’t mean you will too.

You need to consider how much you’re going to need to live on when or if you reach your 70’s, 80’s or even 90’s. And taking your pension early with the actuarial reductions applied will mean less income when you really need it.

Yes, they’ll always be people like your mate who lose out, although I assume his wife would be getting a pension now. And they’ll always be people who live to a ripe old age and get their pension for maybe 30-40 years. All I’m saying is that on average, taking your pension early will end up being a mistake for most people.

Really it's just a big gamble, I hope yours pay off.