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

[Needacupofteaandcrackers]

Hello Please can anyone advise me.

On the online site the transfer value of my pension has reduced by over £100k to £300k, since 2021. The yearly pension has increased slightly to £16 per year, when I am 60years, in just on over 2 years. This is for LCP Telefonica pension.

When I rang them today they just quoted “market forces “ and in an email have said nothing is affected and they reassure “some reassurance that this is simply about a change in the cost to the scheme of meeting the pension promises they have made to you, and is common across the industry.”

But this is not true because my 25% tax free amount has now similarly reduced, so it has a significant impact ?? So why are they trying to bamboozle me !!! And how do I respond?

This is in contrast to colleagues at aviva pensions who have seen yearly increases.

Are you contributing to this pension?
What funds is the pension invested in?

As above what are your funds invested in? Is this a pension based on your final earnings and number of years service or a regular pension invested in the stock market and dependent on fund performance?
Also a transfer value rather than a current value may have penalties.
A 33% drop is a lot if it is in stocks

If it's a final.salary pension the transfer value is in no way related to the tax free cash. The cash is based on the pension figure. The only way it would have reduced would be if the scheme trustees have changed the commutation factors since your previous quote.

They will have changed their actuarial assumptions used to calculate transfer values to reflect changes in market conditions since 2021. No one is trying to "bamboozle" you and you don't need to respond.

The rise in gilt yields since 2021 will have led to a drop in the transfer value of a DB scheme, if you’re looking to transfer out, but won’t make any difference to the actual benefits received if you stick with it. At one point DB schemes, when interest rates wee almost 0%, were offering 30/40 times the annul penson payable to get rid of the liability. Today, many DB schemes are in surplus, interest rates are higher and they have no need to aggressively dump liabilities.

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

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

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!

Thankyou for explaining @Tryingtokeepgoing @craigth162

yes it is finally salary. No idea what it’s invested in. I will contact them tomorrow to get an estimate of the 25% tax free amount.

Hello I would like help with a response to the got a message back from LCP pensions, not sure what they mean by factors or also why they have stopped mailing pensions statements

I asked specifically :-

Hello,

Please can I have an explanation as to why my lump has declined by 30% from 2021 of £115,000 to £81,000, based on taking 25% lump sum when I am at 60years.

The response is:-
“
We can confirm that the change in your maximum tax-free lump sum on the Telefonica UK Pension Plan website is due to a regular review of the option factors which are applied to your pension at retirement. If you wish to exercise any options to retire at a different date to your Normal Retirement Age (age 60), or exchange some of your pension for a tax-free cash lump sum, these factors are used to ensure that you are getting a fair value for your adjusted pension and lump sum. Your final salary pension entitlement at age 60 is not impacted by updates to these option factors.

@Tryingtokeepgoing hello thanks for your help earlier I just wondered if you were able to advise on a response as I still don’t get what factors they are referring to ? And how they can say that payment is not affected as the lump sum is.

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.

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!

Thankyou both @Tryingtokeepgoing and @MostHighlyFlavoredGravy yes thanks I will ask them “what the option (comutation) factor used in your 2021 projection was, and what it is in the latest projection.” This is invaluable help x

@Tryingtokeepgoing @MostHighlyFlavoredGravy

thankyou for your help before

I feel gaslighted and can’t get a straight answers regarding previous commutation factors

this was the response

“We can confirm that the Trustee bought an insurance policy with Pensions Insurance Corporation (PIC), called a ‘buy-in’ policy, in November 2024. This information was confirmed in a recent newsletter provided to all members of the Plan.

As such, the Trustee and PIC are required to keep the retirement and commutation factors under regular review and therefore they will change on a regular basis. The Plan’s factors are revised monthly in line with wider financial conditions and actuarial assumptions to reflect the latest expectations of life expectancy, future inflation etc. We note you have asked for a comparison of the current retirement and commutation factors against the previous factors used by the Plan. Please note, we are unable to provide this information as factors are not guaranteed and are subject to regular review.

We can confirm that you are able to view estimated illustrations of your benefits, including your estimated tax-free lump sum, on the Telefonica UK Pension Plan website. Please note these figures are calculated using current retirement and commutation factors. As these estimated quotations provided on the website are illustrative, they may change. If you are planning your retirement soon, you are able to request a formal retirement quote which will include the forms to complete, and return should you decide to proceed.”

not sure of next steps other than get a quote (which was previously sent yearly anyway) but will be as above

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

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.

@MostHighlyFlavoredGravy it still doesn’t make sense as to why my lump has declined by 30% from 2021 of £115,000 to £81,000, based on taking 25% lump sum when I am at 60years. The market has gone up in comparison, so would have expected the same for the lump sum calculation

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.

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.

It’s DB scheme so will have a yearly pension. I’m questioning why the 25% that I can take a 60yrs has drop so much

This poster has explained it perfectly OP.

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 😊

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

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?