Pensions advise needed !!!!transfer value reduce by £100k

This is really a really well articulated response. Thank you.

OP: Have you thought about the implications of taking a 25% lump sum or have you just assumed it's a good thing to do because that's what people (with Defined Contribution schemes) do?

If you take a lump sum then the amount of your guaranteed pension will be reduced. Have you weighed up the benefit of a lump sum at the start of your retirement versus a smaller pension for the rest of your life?

www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics/defined-benefit-or-final-salary-pensions-schemes-explained

Some good replies above - does that help, OP?

@abracadabra1980 your comment about it being like another language is spot on. Part of my job is reviewing pensions member communications and the holy grail of (a) brief (b) easy to understand for the layperson and (c) accurate, is hard to find! It usually feels like we have to pick 2 out of the 3, with brevity being sacrificed, but you then run the risk of the letter not being read at all.

Part of the challenge is that many people (understandably!) ignore letters about their pension until they are in their 50s/60s and thinking about retirement, and then suddenly are faced with big decisions about their benefits. It's too late to do anything about that in the private sector, but I think public sector employers could probably do more to help new starters understand their pension and what a great benefit it is for the amount they have to contribute (you often see posts on MN from public sector workers who don't even understand that they have a defined benefit pension rather than a DC "pot", which blows my mind a bit! But I get that it's easy to say that when I work in the sector).

I think if you take time to digest all the replies above then it will sink in.

I'm in exactly the same boat as you.

In Dec 2020 I was advised by letter that there was £140k in my (defined benefits) pension. I (erroneously) assumed this figure would continue to grow. In reality this was a transfer out value AT THE TIME. So if I had wanted to remove the money from my scheme and invest elsewhere then that is the amount I would have been given. I know this because a colleague transferred out shortly before this date and they received 200k. The general received wisdom is you don't transfer out of defined benefits schemes. Most financial advisors would advise against it.

Fast forward a few years and I thought I'd check again what the "pot" value was. I got a major shock to see it was £100k! I had thought that like a DEFINED CONTRIBUTION or PERSONAL pension the value would go up over time.

Some research led me to understand what has been described by previous posts.

So, in approximate numbers my "pot" no matter its "value" is always going to pay me £5k annually. Similarly your pot, whether on paper it is £300k or £400k, will pay you whatever it is projected to pay you at age 60. It's just that presently the 300k does the same work as 400k did a few years ago. Hopefully that makes sense.

In the big scheme of things you will get what you were projected to get annually. Unfortunately due to "market forces" it's the tax free lump that has taken the hit so yes that is where you lose out.

Depending on what happens between now and then when you reach 60, the 300k figure could go up or down and then the tax free number will similarly go up or down.

It's not nice to have a shock particularly if you were using the higher number to make financial decisions. Hopefully you are now in a better place to understand what has happened.

DB and DC work differently.

DB guarantees a certain amount of pension every year. You don't have an individual pot of money as you would with a DC scheme.

The DB pension company works out how much it will cost them to provide you with the set income each year. This figure didn't used to be of interest to the member themself because it didn't affect them - they knew they were getting £x at retirement so as long as the pension fund has enough to cover that, they don't need to know the mechanics.

But with the option of accessing 25% of the value, you have been looking at the transfer value of your pension. However you don't understand that the transfer value isn't the value of a pot of money that belongs to you (as it would in a DC scheme). The transfer value of a DB scheme is the amount, at that point in time, it would cost to provide you with the set £x pension for the rest of your life. Similar to how an annuity works. This amount varies over time - sometimes it would be more expensive, sometimes it would be cheaper.

So the 25% is based on the value, at this point in time, of the amount of money it would cost the pension fund to generate your entitlement to receive £x per year. And it sounds as if the amount the provider needs to fulfil it's obligation has dropped from the last time you asked them.

A 25% lump sum would mean reducing your guaranteed £x pension and the pension fund giving you the amount they no longer need to maintain payment of the whole £x. That's what PPs have been explaining.

this is my understanding, but not my field.

Your pension at 60 cannot go up and down with investment returns - it is a defined benefit.

however the cost (to the trustees) of providing that benefit can change. A transfer value is an estimate of the cost of providing that pension. This can go up and down based on the assumptions trustees make about future investment strategy, mortality inflation etc.

You can give up 25% of your pension for a lump sum. That is a set amount of pension.

However how that lump sum is calculated depends on assumptions made by the trustees - investment returns, mortality and so on. So the “value” attached to the 25% of pension can change.

Does that make sense?

Are both calculations based on you taking the lump sum at 60?

OP I admire anyone being able to understand this who isn't in the finance world. It's like learning another language.
Surely pension language can be simplified these days.
I use Chat GPT an awful lot. I find it enormously helpful for questions and sometimes ask it to break things down to me as if I'm a 5 year old 😊

This poster has explained it perfectly OP.

Not for final salary schemes, the lump sum has nothing to do with market performance.

The lump sum is based on the cost “saved” of not having to provide the amount of guaranteed income you give up. That is the “commutation rate” referred to above, and those will change regularly. As annuity rates rise, the lump sum will decrease, and annuity rates have risen significantly over the last two years.

Annuity rates are based on lifespan projections and gilt rates, which if anything are slightly inversely correlated to market performance.

OP: is your pension a Defined Benefit scheme or Defined Contribution? Do you understand the difference?

It sounds like it might be a DB scheme but you're expecting it to act like a DC scheme, ie having a pot of money to access.

Other than getting a quote there isn't really anything you can do in terms of "next steps" because where elements of your benefits are calculated based on actuarial factors then your entitlement is based on whatever the factors are at the time - the factors used in the past are irrelevant (I'm not an actuary and dont know whether it would be typical to disclose "old" factors for information purposes, but they could be worried about creating further confusion). Is there a phone number for the scheme administrators in the newsletter they sent out? If so then someone might be able to explain things over the phone to put your mind at ease. I know it's complicated but it doesn't sound as though anything untoward has happened here.

I'll try and explain as best as I can, but please do ask any questions.
Transfer values are set based on current market conditions.

So say you're due a pension of £1000 per year from your pension scheme.

You want to take that £1000 per year out.

The actuary has to convert that to a lump sum figure.

They'll base that on market conditions and what the scheme is investing your money in. Eg "I'd have to invest £A in equities and bonds to give this person £1000 a year".

Market conditions change. So now, it seems, they only have to invest £B (less than A) in equities and bonds to give this person £1000 a year.

The main reason for this is that gilt yields have gone up in the last few months. Gilts are issued by the government to individuals, you buy them and they pay you back "coupons". It's basically like lending the government money and them paying you back with interest. In the last few months the interest the government is paying back on gilts is higher.

Does that make sense?

PS it's odd they won't give you the factors themselves but you can ascertain roughly what they've used yourself

This is correct. I'm not an actuary but work in the industry. The final bit about your entitlement at age 60 being unaffected just means that there is no change to the amount of pension you are projected to get at age 60 (based on the accrual rate × pensionable service x final pensionable salary formula and then revalued to take into account inflation during the period between leaving service and retiring) if you retired without taking a tax-free cash lump sum. The impact of the factors change just affects the amount of tax-free cash you get for each £1 of annual pension exchanged (or "commuted") for a tax-free pension commencement lump sum. Hope that makes sense!

I am not an expert, but I think that lump sums for DB pensions are calculated based on what's called a 'commutation factor', which is effectively how much tax free cash you get for every £1 of pension given up. It seems as if the Telefonica DB scheme calls this an option factor.

These have to be reviewed periodically to ensure that members are treated fairlly, regardless of whethter they take a lump sum or not. I guess, but don't know for sure, that there is a correlation betwen gilt yields and commutation factors, and so as gilt yileds increase comutation factors fall, and you 'need' a lower lump sum to compensate for each £1 of pension given up.

So, if I were you I would ask them what the option (comutation) factor used in your 2021 projection was, and what it is in the latest projection.

Indeed. I was offered, in 2022 £147k against benefits of circa £6k pa. Scheme was desperate to off load. I have to apply each time to get a transfer value but guarantee it won't be that now!

This is exactly how my IFA explained it to me last week.
Unless things change, ours will stay put until we are 65. 🥴

The last thing you want to do is transfer out of a DB pension! You need some pension advice.