How to make the new DC pension work for you

[RobertT]

Following Royal mail’s decision to change our pension arrangements, I’ve read several posts on these forums that say ‘my pension’s been reduced by £5k’ or ‘it’s going to be half what it would have been’, etc. And I’m not trying to say it won’t be! But there are ways to make your DC pension work for you and still manage to retire at a reasonable age.

The illustrations on the literature RM has sent us assume we buy an annuity with our DC pension and that annuity will provide similar benefits to our current RMPP(NRA60&NRA65) pensions. In other words, an income that rises with inflation and provides a spouses pension of 50% after our death. Unfortunately the amount we would actually get is very low. It will depend on age and to some extent health aswell, but assuming buying that annuity at around age 60/65 and on the terms mentioned above, the starting amount is likely to be around £25-£30 per year for each £1,000 in your pot. Less if you choose to take a lump sum.

There are other annuities available which may be more suitable to your needs – if you’re single for example. Or if you don’t want one which increases with inflation, in which case, the headline rate will be higher, but it will never increase. So what might be enough at age 60, perhaps won’t be at 80. This will give you a rough idea of your options and what you might expect to receive: http://www.ft.com/personal-finance/annu ... sktop=true" onclick="window.open(this.href);return false;

Any annuity we buy could be from the DC pension provider(Zurich?) or on the open market, where we could get a better deal.

We also have the opportunity to use the pension flexibility rules that were introduced in April 2015 and outlined here: http://www.royalmailchat.co.uk/communit ... 27&t=69013" onclick="window.open(this.href);return false;
These rules mean that we don’t have to buy annuity with our DC pension pot at all and give us 4 different choices:

a. Take your whole pension pot as a lump sum in one go. A quarter (25%) will be tax free and the rest will be subject to Income Tax and taxed in the usual way. Bear in mind that a large lump sum could tip you into a higher tax bracket for the year.

b. Take lump sums as and when you need them. A quarter of each lump sum will be tax free and the rest will be subject to Income Tax and taxed in the usual way. Bear in mind that a large lump sum could tip you into a higher tax bracket for the year.

c. Take a quarter of your pension pot (or of the amount you allocate for drawdown) as a tax-free lump sum, then use the rest to provide a regular taxable income.

d. Take up to a quarter of your pot as a tax-free lump sum and then convert some or all of the rest into a taxable retirement income (known as an annuity).

More info here: https://www.moneyadviceservice.org.uk/e ... on-schemes" onclick="window.open(this.href);return false;

Bear in mind that only income above the personal tax allowance is taxable, so it might be possible to take some or all of your DC pot completely free from tax on top of any tax free lump sum. Although that would probably require a certain amount of planning and discipline and depend on individual circumstances.

The ‘pension illustration’ we’ve recently got off Royal Mail is very mis-leading and intentionally so in my opinion. It brings all your pension provision together – NRA60, NRA65, new DC pension and state pension despite the fact these are all separate elements and with separate rules and separate ages. Therefore I think it’s best to base your pension calculations on:

a. Your Royal Mail pension statement – it’s trusted and been basically the same for years(the one with the squirrel).
b. Your AVC/new DC statement- which shows how much it is currently worth aswell as potential value in the future.
c. Your state pension statement – which tells you how much you’ve accrued to date and how much more you could get by continuing to work and pay NI.

These things are always down to personal circumstances to one degree or another, but in my opinion a good way to see if you’re able to retire at a certain age is to find out what is available to you at that age and then decide if you can afford to live on that amount of money. That may sound simple, but in practice not many people actually do it. I think it’s best to start at state pension age and work backwards. For example:

1. My state pension age is currently 67. At that point I will obviously have my state pension plus my NRA60 and NRA65 from Royal Mail. I then need to ascertain how much each element is likely to pay out and whether I can afford to live on the total. In my case the total based on RMPP up to 2018 and SP, would equate to about ¾ of my current Royal Mail wage and I know I can live quite happily on that amount of money.

2. What will I get at 65? - I might only have the NRA60 and NRA65, so can I afford to live on that? I probably could but after I’ve paid for the basics(food, utilities, etc) there wouldn’t be a huge amount left over. So what else can I bring to the table? That’s where AVC’s if I’ve already got them or the new DC pension pot comes into the equation. Which as covered above, can be taken as cash. So could I supplement my NRA60+NRA65 with that money until state pension age?

3. What will I get at 60? - I will only have the NRA60 which I wouldn’t be able to live on by itself. So again I would factor in any AVC’s and DC pension pot to see if it would last until state pension age.

4. What about before 60? – The same applies but I might have to factor in reductions for taking one or both of my RMPP elements early or possibly living off just my DC pot for a certain length of time.

Any other pensions you might have will also need to be taken into account.

In summary, although the proposed changes to our pension scheme may involve big drops in pension income from 65 in particular. We also have the ability to use the new DC arrangement to our advantage and still potentially retire at a reasonable age.

[fly-catchers]

A very useful and common sense approach to the pension situation Robert. Pity that RM cannot employ you to advise them and at the least get you to write the illustrations! Though I agree that the current material from RM is definitely written in a way to confuse and cover up the actual losses you will potentially experience. I will print this out and give copies to some of my colleagues who don't venture on this forum and are ready to pull out of the RM pension plan completely!
Despite these possible changes are you still remaining on target to get out by 60?

If you do leave at 60 like I am considering I know you can defer the 65 part till 65 and get it in full all that you have paid into it. But can you if needed arrange to take it earlier later on once you have left RM? Or does that decision only occur at the time of leaving.

Thanks again Robert for all your continued help and straightforward advice..

[RobertT]

Thanks for the comments.

Although it looks like my NRA65 pension is going to be lower than I’d planned, my AVC’s and the new DC pot will help to supplement my income up to state pension age, so yes I am on target.

Personally I'm planning on taking my RMPP at what I see as the correct ages, so at 60 and 65. But if you take your NRA60 at 60 and defer your NRA65, you do have the option of then taking it before 65 if you want, with the normal reductions being applied.

[vmaxv4]

Great article, genuinely put together by someone who cares..& knows his stuff.

P.S.E
Plain Simple English

[Nikellie]

I totally agree with Robert, I'd much rather have flexibility and choice as opposed to inflexible Defined Benefit scheme.

I joined Royal Mail just after the DB scheme closed so I'm hoping that RM will increase their contribution as part of the new pension deal (17% employer and 8% employee would be nice!!).

I too suggest shopping around for annuities, check any other pensions you have, get a State Pension forecast, illustrations for the new DC scheme and perhaps open your own Pension or AVC (beware of contribution limits).

You might find you can retire a lot earlier than 65.

[emilyjay29]

Great post Robert ,and very well explained.

[trythat]

A very nice article Robert. But if possible can you confirm the following?

I'm coming up to 54 and intend to finish sometime this year after 27 years in (going to live on saved ISA's). Am I correct in the assumption that my pensions will be halted at this years value and increased by a maximum of 5% which going forward may well be enough as I don't see inflation going above 5% for some time?

I'm the same as you in having a pension age of 67, is it possible for me to get a forcast yet or am I to young? I've looked on the Gov site but not seen anything for people below 55.

Thanks again for all your posts, always enjoy reading them.

[heapsy]

A very good post. Just wondering if all of these options would actually be available? I read recently that many insurance companies are not playing ball with the governments idea of shaking up the pensions industry. It seems that it is only an option that they may, or may not choose to offer. A typical half baked approach if you ask me. The government should have made it law that these options are on the table, afterall, it was the government of the day that screwed the whole pension landscape up in the first place.

[philip.p]

Thank you Robert , this has answered lot's of the questions we have had in our office. It's a pity the original statement from Royal Mail did not deal with this.

[jetblack]

I totally agree with Robert, I'd much rather have flexibility and choice as opposed to inflexible Defined Benefit scheme.

You might find you can retire a lot earlier than 65.

Is this post a joke ?

[RobertT]

A very nice article Robert. But if possible can you confirm the following?

I'm coming up to 54 and intend to finish sometime this year after 27 years in (going to live on saved ISA's). Am I correct in the assumption that my pensions will be halted at this years value and increased by a maximum of 5% which going forward may well be enough as I don't see inflation going above 5% for some time?

If you leave this year you won't build up any more pension and it will be deferred until you take it. Based on the info in the library section of the pensions website, your pension will then increase with CPI until you draw it and then by RPI when in payment. It’s not 100% clear if the proposed changes in 2018(after you’ve left RM) will affect that.

I'm the same as you in having a pension age of 67, is it possible for me to get a forcast yet or am I to young? I've looked on the Gov site but not seen anything for people below 55.

I’m a bit younger than you but have got 2 state pension statements by post in the last 2-3 years with no problems at all. Although in my experience it will take about 6 weeks to come through. Alternatively you can get one by phone or online. All the info is here: https://www.gov.uk/check-state-pension" onclick="window.open(this.href);return false;

[RobertT]

A very good post. Just wondering if all of these options would actually be available? I read recently that many insurance companies are not playing ball with the governments idea of shaking up the pensions industry. It seems that it is only an option that they may, or may not choose to offer. A typical half baked approach if you ask me. The government should have made it law that these options are on the table, afterall, it was the government of the day that screwed the whole pension landscape up in the first place.

It is true that many pension providers don’t offer all the flexibilities that they could and that's a government failing. But there is nothing stopping you from transferring your DC pension pot to somewhere that does offer what you want.

[RobertT]

I totally agree with Robert, I'd much rather have flexibility and choice as opposed to inflexible Defined Benefit scheme.

You might find you can retire a lot earlier than 65.

Is this post a joke ?

That’s exactly what I thought Jet!

DC pension pots and/or other savings such as ISA’s have got their place and can be quite useful in enabling an early retirement or as a cash fund to dip into during retirement, as I explained in my first post. But over 20-30 years of retirement nothing really beats the guaranteed index linked income provided by a DB scheme.

[stephen500]

I intend to take both pensions at 60, with the max lump sum and to use that lump sum to give me an extra income of around £10 per year till 67. I will add that to my pension and I should be ok. Don't blow the lump sum on a new car!

[Nikellie]

I totally agree with Robert, I'd much rather have flexibility and choice as opposed to inflexible Defined Benefit scheme.

You might find you can retire a lot earlier than 65.

Is this post a joke ?

That’s exactly what I thought Jet!

But over 20-30 years of retirement nothing really beats the guaranteed index linked income provided by a DB scheme.

Who says you live 20-30 years? If you live to 95 how much income will you actually want?

What's happens if you retire at 65 and die at 75? You'll have 10 years then perhaps a 50% pension for your spouse (maybe less, depending on the scheme) Then the pension finishes on second death and guess what - the annuity provider/fund keeps all the money you paid in

A DC scheme offers continued flexible drawdown for your spouse of ALL of your fund, perhaps cash left at the end after death for inheritance, access to capital (e.g. house repairs, help kids) and the freedom to make those decisions.

A fixed income is certainly not my idea of a useful financial planning tool when circumstances change in retirement. All this against a background of historically low annuity rates too?

The old way is costly, outdated and inflexible.