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  1. #1

    Defined Benefit Cash Balance vs defined contribution pension

    My DH has a Royal Mail pension and I am finally starting to get my head around the proposed changes to it in preparation for section B and C of the RMPP closing at the end of March.

    Can I check my understanding of this and get your thoughts on building the maximum pension possible?

    I understand that there are two options on the table: a Defined Benefit Cash Balance scheme or a Defined Contribution scheme.

    Defined Benefit Cash Balance scheme
    I understand that a Defined Benefit Cash Balance scheme means DH would get a guaranteed minimum lump sum (not yet specified what the minimum will be) on retirement. It has a higher RM company contribution of 12.6% of pay while he continues to pay his usual amount (6%). There are discretionary increases dependent on investment returns. If the lump sum has not built up enough to cover the required 25% when he retires then the outstanding sum would come from his Final Salary/Career Salary Defined Benefit pension fund. Anything left over in the Cash Balance 'account' has to be used to buy an annuity (I think?) so presumably if he decides not to take the lump sum he can arrange an annuity for the whole amount (no information available on this yet).

  2. #2
    DH is 56, has 13 years in the RM final salary scheme and a further 9 years in the Career Salary Defined Benefit scheme. He also has a SIPP with about 12k in it, which we add to, and around 4000 of RM shares (current value). We don't want to take the 25% lump sum but build the pension to its maximum possible. He was going to retire at 60 but we decided to buy a smallholding and take on a larger mortgage last year, so he will work on although we might consider part-time after 60 if finances allow.

    I've never come across the Cash Balance Scheme before so have very little idea of the sorts of advantages and disadvantages it may have over a Defined Contribution. The illustrations sent to us are based on examples of people who are younger than my husband, with 30 years pensionable service and earning at least 8k more (so more like a manager than a postie), so while the figures look good I am concerned they may have been manipulated to look that way and it is a poor option for my husband.

  3. #3
    Hmmmm....tumbleweed! Oh well, I'll carry on and put down some thoughts anyway, as it is helpful for me to be able to write things down.

    I did some figures this morning that seemed to suggest that cash balance would be better for him (but only just) as he is close to retirement, and there are still a lot of unanswered questions.

    If he went at 60, the higher contributions from RM + targeted returns of 2% above CPI (I took an average CPI of 1.35% over the last five years) would bring back a pot of about 15,500. I haven't factored in any discretionary bonuses and I do not know what the 'promised' guaranteed minimum amount would be. It could be higher than 15,500.

    A defined contribution pension with the lower contributions from RM would bring back about 13,250 working on 5% growth (taking into account inflation) but obviously this could be much lower.

    If he retires at 65, the figures come out at about 38,190 vs 33,900.

    One of the things I'm not entirely happy with is if he is forced to buy an annuity with any outstanding amount of the cash balance, which to be honest isn't likely to be a large amount given the short timescales left to build it up. We would prefer to have the cash, and pay tax on the remaining, as the few piddling quid a month that an annuity would bring in would be more useful to us for upgrading the house if required.

  4. #4
    One thought is that amounts of 13000 - 15000 could come under the "Triviality" rules. If these were regarded as separate pots, then in theory they may be payable after age 55 (presumably subject to tax on 75%).
    However there are things like whether the scheme allows it and if the pot would be linked in some way to the rest of the pensions so that everything has to be taken at the same time.
    There will be someone along who has a better knowledge on this and can correct me if I'm wrong.

  5. #5
    As an employee of Royal Mail myself I will also be affected by the closure to future accrual of the RMPP from 1st April 2018. I have noticed you seem to be reading some of the information given out incorrectly. Here are a couple of things you need to be aware of:

    1. The proposed employer contribution for current employees in the RMPP is 13.6% of pensionable pay for both the Cash Balance and the DC alternative.
    2. The 10% rate only applies to those posties in the current Royal Mail Defined Contribution Plan.

    With both the Cash Balance & the DC scheme he will just be building up a pot of money with which he’ll have a number of different options:

    Cash Balance

    1. Use to fund the tax free lump sum at retirement and with anything left over he could transfer out to buy an annuity or drawdown.
    2. Transfer out independently of his main scheme benefits to buy an annuity or drawdown.
    3. His pot will be worth a minimum amount based on total contributions with the addition of investment growth of which CPI+2% is the aim. But currently no info on where money will be invested.
    4. Normal retirement age of 65, so possible reductions if taken early.
    5. The ability to transfer to the DC option if desired.


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