FROM: Executive Director, NYC Police Pension Fund
TO: All Uniformed Members of Service
SUBJECT:RAMIFICATIONS OF THE FINAL LOAN
DATE: September 18,2007

1. Each Fund member has a required amount upon their twentieth anniversary, depending on their assigned contribution rate and their pensionable earnings during that time period. When a member retires, we perform an audit of the members account. If he/she has the required amount in the account, he/she is eligible for the maximum pension benefit. If a shortage is found, he/she is advised and given the opportunity to pay back the shortage into the account, and if as in most cases he/she elects not to make up the shortage, the shortage is then multiplied by his/her actuarial factor, and the pension is then reduced by the resulting amount for life. For example, a forty-five year old member retiring for service has a $50,000 shortage which is not repaid. Multiply the actuarial factor (per thousand) of $62.07 times 50 results in a pension reduction of $3103.50 per year for life. Members who have an excess are also so advised and they can leave the excess in the pension to generate an added benefit or they may take the excess without reduction to the maximum benefit.
   
   
2. At the time of retirement, pursuant to current pension law, members may take a loan from their account, up to 90% of the total. If a member takes out a final loan at retirement, it is treated as a shortage when the pension is computed, and as described above will reduce the member’s pension for life. The same rules apply for the balance of an existing loan outstanding at the time of retirement. (Please note that any outstanding loan would be included in the total pre-retirement shortage noted in the example in paragraph 2). A chart showing the dollar cost of shortages (per thousand) is provided with this letter. Members hired after August 19, 1985 are subject to a higher cost and should pay particular attention to this issue.  All such monies which were contributed into the account before federal taxes, are subject to Federal tax (and possible 10% penalty for members younger than 50) if not properly rolled over into an IRA or other qualified retirement vehicle. Contributions made before November, 1989, lump sum contributions or the extra 50% contributions have already been taxed and will be eligible for a tax free distribution if any of these funds are available in the members account.
   
   
3. Members often ask whether or not they should take this loan and if they are taking this loan at an early age, won’t they be paying it back several times over their lifetime. There is no right or wrong answer to this question but there are a number of factors and strategies to consider including:

   • Your current age
   • Your current marital status and dependents
   • Your life expectancy (family history)
   • Your financial situation
   • Your tax bracket (loan reduces your taxable income)
   • The cost of this loan vs. unexpected investment returns
   • Your plans after retirement – will you work, will you earn another pension, etc.
   • How will you invest the money and what is your risk aversion.

Take the example above with a 45 year old member (hired PRIOR TO 8/85) retired for service with a shortage of $50,000, who decides to take a final loan of $40,000 untaxed monies.

Here is an example of a 45 year old MOS who was hired AFTER 8/85:

These common examples seem to indicate that the final loan is an easy decision. It is not. Tax consequences must be considered as well as some alternative strategies including:

• Leave the $40,000 in your account and invest the additional income ($2482.80 or $3271.20).
• Leave the $40,000 in your account and purchase a $40,000 life insurance policy (protecting the principle) for a fraction of the cost (provided you are in good health and get a very competitive rate), this increasing your pension amount life.

Obviously, this decision is complicated and as stated above what is right for one member is not necessarily right for the next. Our retirement counselors cannot make this decision for members, but hopefully this information helps clarify the issues. It is important to remember that in this as well as all other important decisions at the time of retirement, members should consider consulting with professional advice before making their decision. The more information and planning put into your retirement decisions, the less anxiety and worries you should have when the time finally arrives.

COST OF SHORTAGE PER THOUSAND
*THESE FIGURES ARE BASED ON A SERVICE RETIREMENT APPOINTMENT

  *Example: A forty-five year old member hired PRIOR to 8/19/1985 retiring for service has $50,000 shortage which is not repaid. Multiply factor (per thousand) of $62.07 times 50 results in a pension reduction of $3103.50 per year for life.

COST OF SHORTAGE PER THOUSAND
*THESE FIGURES ARE BASED ON A SERVICE RETIREMENT APPOINTMENT 

 *Example: A forty-five year old member hired AFTER 8/19/1985 retiring for service has $50,000 shortage which is not repaid. Multiply factor (per thousand) of $81.78 times 50 results in a pension reduction of $4089.00 per year for life.