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.

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.

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.

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).

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

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