• What Nick’s Reading | You Could Increase the Value of Your Shell 80 Point BRP Pension by More Than $200K by Retiring 31 Days Earlier

     

    Most of our Shell clients do not realize that their pension can be impacted by interest rates. Specifically, their Shell 80 Point Benefit Restoration Plan (BRP) Pension.

     

    For high income earners that have spent their entire careers at Shell, properly managing this impact may amount to saving hundreds of thousands of dollars—especially for those that are planning on retiring in the near term.

     

    This article will walk you through how interest rates impact your Shell 80 Point Benefit Restoration Plan Pension payout and what you can do about it.

     

    A Brief History of Interest Rates

    Economists have been continually calling for interest rates to increase for nearly a decade and now, we are beginning to see this happen. 

     

    As you may know, the Federal Funds Rate (FFR) for 2018 started at 1.42% on January 4, 2018 with three rate hikes so far, not including the additional rise in rates we will likely experience by the end of this year. The FFR reached 2.18% on October 16, 2018.

     

    Likewise, on January 2, 2018, the 10-Year U.S. Treasury started the year off at 2.46% and increased to 3.16% by October 16, 2018. Compared to historic trends, we are at unprecedented low levels of rates.

     

    Note, this does not mean rates will go up immediately. Economists have been wrong for a number of years, and just because we have seen a major movement in rates this year doesn’t mean they will keep going up next year. However, we do know that the rise in rates we have already experienced from September 2017 to September 2018 is going to impact the value of pension lump sums for our Shell clients retiring in the near future.

    2018 Intere

     

    Wait My Shell 80 Point Pension is an Annuity, Interest Rates Shouldn’t Affect Me!

     

    Yes, your Shell 80 Point Pension is required to be paid out as an annuity. You cannot take it as a lump sum. Interest rates primarily affect lump sum pension payouts.

     

    What you may be forgetting is the 80 Point Benefit Restoration Plan (BRP) Pension. If you are a highly compensated employee of Shell Oil and are on the 80 Point Shell Pension Plan, it is likely that Shell is making contributions to the Shell 80 Point BRP Pension on your behalf. When you retire, Shell pays a lump sum benefit to your BRP Pension approximately 90 days after your retirement date (6 months if you are considered a key employee). The Shell BRP Pension is immediately taxed at distribution. If you want to learn more about how to minimize taxes, read my article on Shell BRPs and taxes.

     

    The Shell Benefit Restoration Plan Pension is a non-qualified pension plan, meaning it does not receive the same preferential tax benefits as your qualified pension.

     

    For most retirees, this means the Shell BRP Pension is paid out within 90 days of retirement and immediately taxed. You cannot roll your BRP over into your 401(k) or IRA. You cannot elect to defer receiving proceeds from your BRP over time (unless you have an Old Money contribution, or made prior to benefit elections in 2007).

     

    Changing Your Retirement Date May Save You More Than $200,000 in Taxes on Your Shell 80 Point BRP Pension Lump Sum Payout

     

    November 30th Retirement Date

     

    For this example, let’s assume the Shell employee meets the following criteria:

     

    a) 60-year-old retiring November 30th

    b) Pension starting on December 1st

    c) Average Final Compensation is $600,000

    d) Thirty years of service with Shell

    e) The value of both the traditional 80 Point Pension and BRP Pension is worth $24,000/month

    f) Netbenefits is showing a traditional 80 Point Pension of $11,000/month

    g) Life Expectancy is 83.2 years

     

    If we run the math on the above example, then the value of the lump sum BRP Pension is worth around $2,629,000.

     

    Let’s briefly walk through how the math works to perform a rough calculation of the estimated value of the BRP Pension lump sum. Essentially, it comes down to basic time value of money. Since the lump sum is simply the present value of future estimated monthly BRP annuity payments, we need to calculate a summation of all future BRP theoretical annuity payments over the employee’s estimated life expectancy discounted by the applicable rate. 

     

    PV = PMT1/(1+r)1 + PMT2/(1+r)2 … PMTN/(1+r)N.

     

    Remember, as interest rates go up, the pension value will go down, and vice versa.

     

    The Recent Changes in Segment Rates and Their Impact on Your Shell 80 Point BRP Pension Lump Sum Payout

     

    You may have noticed that rates from September 2017 through August 2018 have risen significantly. The September 2017 rates will not be published until October 12, 2018, but we can estimate what they will be with a reasonable degree of accuracy.

     

    Note, higher interest rates mean a lower value for your Shell 80 Point BRP Pension lump sum.

     

    Segment Rates

    December 31st Retirement Date

    Let’s re-run the above example and change the Shell employee’s retirement date to be 31 days later than the previous example.

     

    a) 60-year-old retiring December 31, 2018

    b) Pension starting January 1, 2019

    c) Average Final Compensation is $600,000

    d) Thirty Years of Service with Shell

    e) The value of both the traditional 80 Point Pension and BRP Pension is worth $24,000/month

    f) Netbenefits is showing a traditional 80 Point Pension of $11,000/month

    g) Life Expectancy is 83.2 years

     

    If we re-run the example with a December 31, 2018 retirement date and a pension start date of January 1, 2019, then the value of the lump sum is worth approximately $2.4 million—that is a difference of around $229,000! Simply by retiring 31 days earlier, this Shell employee could save hundreds of thousands of dollars!

     

    Who Can Benefit From This Shell 80 Point BRP Pension Strategy?

    Those who should be considering this strategy are Shell employees who are planning to retire in the next 18 months, but are also able to retire at an earlier date. This strategy may not fit those taking voluntary severances as Shell may have requirements for their termination date, and the severance can be worth a substantial amount as well.

     

    We are helping our Shell clients who are looking at retiring in the next 18 months to analyze their choices considering today’s rising rates so they can make the best election decision for their situation. Of course, taxes, other financial assets, personal goals, and financial needs all come into play. That’s why we perform a comprehensive assessment with our clients, instead of simply looking at one item.

     

    If you are looking at retiring in two to five years, and are concerned about how rising rates may affect your lump sum pension, don’t over react. The value of your pension will increase by working longer and no one knows exactly how much rates are going to rise.

     

    Please note, this a general education article illustrating some of the ways we help our clients make complex financial decisions. Before you make any decision, we recommend you work with a fiduciary financial advisor and seek confirmation about your pension benefits and choices from Shell HR. There are numerous employees at Shell who have varying pension rules due to acquisitions, obtaining U.S. citizenship, being on the APF pension plan instead of the 80 point, as well as additional factors. It is best to confirm how your retirement date affects your pension before making any decisions.

     

    If you have questions about your Shell benefits and would like to get a second opinion, contact one of our advisors who specialize in helping Shell employees make the most of these retirement savings tools.

     

     


    nickNick Johnson, CFA®, CFP®

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    Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.

     

    As Vice President and Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.

     

     


     

     

    Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions. 

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