How does DC scheme compare to DBCB scheme?

[posted]

Hi All,

I can't seem to work out the material difference or affect of switching from the DC scheme I'm in to the proposed DBCB scheme.

Got a potentially another 30 years of work to go

I contribute 6% and RM will contribute 10%. ooking at how the fund has performed over last 7 years, it's an annualised average of 13.4% (ranging from 0.6%/year to 26.9%/year). Obviously inflation also eats away at some of it.

Now the DBCB scheme.. RM will contribute 15.6% of pay, great.
With lump sum, they are saying the guarantee 19.6% of pensionable pay. That's the bit I don't get. What does that mean?

to keep things simple are they saying if i was on £20k/pa they would guarantee i could get a lump sum of c£4k, for every year I contribute?
So in 30 years time that would be 120k, which doesn't sound right to me i.e sounds like a lot.

They would also ensure the pot grows at CPI+2% too?

I appreciate we'll get a booklet but I'm not sure how personalised it will be. Difficult to understand and compare pensions

[RobertT]

Hi All,

I can't seem to work out the material difference or affect of switching from the DC scheme I'm in to the proposed DBCB scheme.

Got a potentially another 30 years of work to go

I contribute 6% and RM will contribute 10%. ooking at how the fund has performed over last 7 years, it's an annualised average of 13.4% (ranging from 0.6%/year to 26.9%/year). Obviously inflation also eats away at some of it.

The returns go up or down depending on where your money is invested. The last 7 years have been pretty good as far as stock markets are concerned and that has been mirrored in your DC fund/s. Just wait until there’s a big market crash, which there will be sooner or later – your balance will drop like a stone.

Now the DBCB scheme.. RM will contribute 15.6% of pay, great.
With lump sum, they are saying the guarantee 19.6% of pensionable pay. That's the bit I don't get. What does that mean?

It means they’ll be 19.6% of your pensionable pay going into your ‘cash balance’ and that is guaranteed. It might go up if the investments do ok, but it won’t go down.

to keep things simple are they saying if i was on £20k/pa they would guarantee i could get a lump sum of c£4k, for every year I contribute?

In simple terms, yes! Although current section C members will still have the Lower Earnings Deduction to factor in. Plus it will have an NRA of 65, so taking it before that age would mean a reduction.

So in 30 years time that would be 120k, which doesn't sound right to me i.e sounds like a lot.

After 30 years it would mean £120k, but the DBCB scheme is only supposed to be for a transitional period. Current DC members need 5 years service to qualify for the transitional DBCB scheme being introduced on 1st April 2018(assuming a yes vote). But only 1 years service to qualifying for the proposed CDC, assuming that comes to fruition.

They would also ensure the pot grows at CPI+2% too?

That’s the target, nothing is guaranteed.

[mark.cup]

RobertT I may be confused but I'm sure I read somewhere that if you took all your benefits at 60 there would be no reduction to your cash balance lump sum?

[posted]

Thanks RobertT
I completely accept the risks involved with DC scheme. I went into eyes wide open. My thinking is stock markets will go through cycles so should smooth out.

What I do t understand from your explanation is where is the defined benefit. If as, as you say, they are only guaranteeing what goes into a pot (19.6%) then that is a defined contribution. The benefit must what comes out of it. Unless they are saying they will only guarantee you get what you (and RM) put into it, with the hope of some growth

[RobertT]

RobertT I may be confused but I'm sure I read somewhere that if you took all your benefits at 60 there would be no reduction to your cash balance lump sum?

Yes! Just to confuse matters, the Cash Balance scheme has an NRA of 65, but if you take it at 60 along with your NRA60, it won’t be reduced.

Presumably that means if you take it any other time, like before 60 or sometime between 60 and 65 along with your NRA65, it would be reduced?

[RobertT]

Thanks RobertT
I completely accept the risks involved with DC scheme. I went into eyes wide open. My thinking is stock markets will go through cycles so should smooth out.

What I don't understand from your explanation is where is the defined benefit. If as, as you say, they are only guaranteeing what goes into a pot (19.6%) then that is a defined contribution. The benefit must what comes out of it. Unless they are saying they will only guarantee you get what you (and RM) put into it, with the hope of some growth

You better ask RM that question!

I agree, the transitional Cash Balance scheme is essentially a DC scheme and is basically the same as RM’s proposals of a few months ago.

For current RMPP members, it will be ‘attached’ to their NRA60 and/or their NRA65 pensions and will provide a lump sum when they take their benefits. As most current employee members of the RMPP are in section C and most take the maximum lump sum, this will enable them to take a lump sum without commuting as much pension to get it.

So rather than it being a DB scheme, the Cash Balance proposal just enables RMPP members to keep more of their existing DB benefits - i.e a bigger pension for life.

For current DC scheme members, the Cash Balance proposal is still basically a DC pension. You're guaranteed at least what goes in, so no big drops caused by market volility, etc. But there's no investment choice.

That’s my interpretation anyway.

[mark.cup]

It's like Royal Mail mimicking what anyone in section c is doing when having an AVC really!

[RobertT]

Yes! The DBCB scheme is basically the same as AVC’s.

[1scfc]

Reading the above questions and answers , I am puzzled as to whether I should take out an avc now. I realise there may be tax implications and some would be tax free maybe someone can help

[RobertT]

Reading the above questions and answers , I am puzzled as to whether I should take out an avc now. I realise there may be tax implications and some would be tax free maybe someone can help

Firstly we don’t yet know for certain whether we will be able to pay into AVC’s from 1st April, or not. RM’s previous Cash Balance proposals were that the existing Bonusplan(section C) and Flexiplan would stay open. But that hasn’t been confirmed with regard to the more recent plans.

But as the DBCB scheme is to be part of the RMPP and as AVC’s are part of the RMPP, I personally think they will stay available to us. But what happens when/if the CDC scheme is implemented, I haven’t got the foggyist to be honest.

AVC’s are a good way to save. You get tax relief and NI relief(PSE), so each £1 gross contribution only costs you £0.68. Plus Bonusplan benefits from extra contributions off RM too!

They are probably more suited to Section C members because they don’t get a lump sum as standard. But they also have the flexibility to be accessed totally separately from the RMPP, with possible tax implications.

Theres lots more info on the pensions website.

[rogersh]

Re Agreement pre- ballot

DBCB from April 2018 -Qualifying period 5 years SERVICE (Not as mediators report suggested - "Eligibility - RMPP members. Other employees who have completed 5 years contributions to the DC plan following elevation from the nursery scheme will be given the option to join.")

So I am eligible by having 5 years service.
Do I have a choice to stay in the DC scheme?
Would it be advantageous to stay in the same scheme for a longer period?

I see the % rate in the interim DBCB of 15.6 employers contributions is better than the improved 10% in the DC scheme. Although the % reduces to 13.6 in the new CDC scheme - if & when that is introduced.
I have only a possible 5 years service remaining as I have mentioned before - So my aim is more of a savings pot than a wage in retirement which is not achievable in the time remaining.

[RobertT]

Re Agreement pre- ballot

DBCB from April 2018 -Qualifying period 5 years SERVICE (Not as mediators report suggested - "Eligibility - RMPP members. Other employees who have completed 5 years contributions to the DC plan following elevation from the nursery scheme will be given the option to join.")

So I am eligible by having 5 years service.

Yes.

Do I have a choice to stay in the DC scheme?

Yes, see the Q&A's here.

Would it be advantageous to stay in the same scheme for a longer period?

That would depend on your objectives for the money saved.

I see the % rate in the interim DCBC of 15.6 employers contributions is better than the improved 10% in the DC scheme. Although the % reduces to 13.6 in the new CDC scheme - if & when that is introduced.

But 2% of that 15.6% goes towards death & ill health benefits, not directly into your ‘pot’.

I have only a possible 5 years service remaining as I have mentioned before - So my aim is more of a savings pot than a wage in retirement which is not achievable in the time remaining.

The DBCB scheme has a clause that says: ‘the NRA is 65, but it can be taken unreduced from 60 along your NRA60 benefits’. So if you plan to access it at 60 or 65 it may be better to take advantage of the higher contribution rates of the DBCB scheme. Although whether that also applies to DC members joining is not clear, as they don’t have any NRA60/65 benefits!

If you want flexible access from 55+, the DC scheme might be better.

[rogersh]

Thanks again Robert for your reply. - Clarification on 15.6% was useful.
It is not surprising the uncertainty of everyone now, let alone in future.

[Hawkey99]

So the best option for those of us with AVCs who only have a couple of years to go would be ......??

[RobertT]

So the best option for those of us with AVCs who only have a couple of years to go would be ......??

It depends largely on when you want to access your funds and your attitude to risk.

The DBCB scheme offers a higher employer contribution rate, a guaranteed amount with a target return of CPI+2%, but you have to access it at the same time as your NRA60 at 60 or your NRA65 at 65, unless you want to take a reduction. But you can't take it as a separate pot on its own.

Personally, I would say if you’ve only got a few years to go, then it’s best to go with this option to avoid any nasty last minute shocks with stock markets falling, etc.

Remember, you can take upto 25% of your total RMPP ‘pot’ tax free. So that will include your main benefits, AVC’s and DBCB. If you have an amount higher than 25% you can take that as a taxable lump sum, or transfer it to another pension and draw it down possibly avoiding tax, depending on other income.

The DC scheme offers a lower employer contribution rate, no guaranteed amount, better investment options, and you can access it anytime you want to totally separately of your RMPP benefits. So is more flexible.