Lump sum from pension

dwileflunker

Can anyone help me regarding taking my lump sum fom my final salary pension under the new rules? I am entitled to take 25% of my pension pot as a lump sum. My pot is the amount of my final salary pension x 20 which in my case is £15000 x 20 =£300000 which means I can take £75000 as lump sum. I also have a company AVC type scheme in which I have £100,000 which means I can take 25% of that which is £25,000. My question is, can I take the whole of my lump sum out of the company's AVC type scheme or must I take part of it from the main scheme? Taking the £75000 from my main scheme would reduce my pension by more than the £75000 remaining in my AVC would buy me in the form of an annuity. If I could take the whole of my lump sum from the AVC I would lose nothing from my main pension and overall I would gain. I have put the question to the trustees but I seem to have posed a question which at the moment they don't seem to have an answer to. Obviously the scheme rules will be the deciding factor but I would appreciate any help that may be available ready for when they come back with an answer.

Debt_Free_Chick

Depends on the rules of the Final Salary Scheme. They must specifically allow you to take all your cash from the AVC part (the AVC is attached to the Final Salary Scheme).

As you can see, you would gain. But this means that the pension scheme would lose. For that reason, many trustees are not allowing this option.

It could be that your trustees have not yet decided - or even considered this.

dwileflunker

Many thanks for that. Can I assume therefore that if the trustees agreed it wouldn't contravine any government rules by doing that?

jennifernil

Now that the new rules re the lump sum are in place, does this mean you are entitled to take the full 25% of the pot, or can schemes set their own limits?

My husband is due to retire in August next year and wants to take the maximum he is allowed. He has asked what this would be but they are ignoring his request for information. We are trying to plan ahead so it is frustrating not to be able to find out where we stand. He is in a final salary scheme.

dunstonh

Now that the new rules re the lump sum are in place, does this mean you are entitled to take the full 25% of the pot, or can schemes set their own limits?

A final salary pension scheme doesnt have an investment pot to take 25% out of. It has a defined calculation based on years of service. The move to 25% of fund, subject to age allowance doesnt have to be done yet and a quick read of this from a number of sources shows that there still appears to be some confusion on the lump sum calculation when it is a final salary scheme. I have read conflicting notes which doesnt help. It is probable that they are still working on the higher of 3/80ths of final salary or 2.25% times pension subject to earnings cap. Also, it would depend if enhanced protection was applied for before 6th April 2006 under transitional rules (which is unlikely but still a possibility).

The pension scheme booklet will tell you how they calculate the income and pension commencement lump sum. Previous pension statements would indicate values based on retirement age.

For reference I have seen one major scheme say that they will convert part of the 1/80th pension on the basis of receiving £12 of lump sum for every £1 of pension given up. The maximum would be calculated by multiplying the standard 1/80th pension by 5.36 and the potential extra lump sum is the difference between this figure and the standard 3/80th lump sum provided. That scheme is still showing it as a proposed option but not yet in force (NHS in case you were wondering).

jennifernil

Hmm, that sounds quite complicated! The pension scheme booklet has not been updated recently, but we already know what the pension will be at retirement date as he has long enough service to get the maximum 2/3 rds of final salary.
When he enquired about the lump sum that might be available there was mention of the new rule of 25% of the "pot" being allowed, and agreement that the "pot" for this purpose is calculated as 20 times the initial pension entitlement.
However I recall reading somewhere recently, while reading up on the changes, that scheme rules can restrict the lump sum, and this is what we are initially trying to ascertain, but we are not getting any answers.
Do you mean that they don't have to change from the 3/80ths or 2.25 times figures at all? Or is there a date by which they have to sort it all out? We are really confused now as all the stuff we read about "A" day (is that what it was called?) was saying there would be major changes.

Mortgage_&_debt_free

Dunstonh is far more knowledgeable than myself in this area but I asked this question of my (excellent) pension dept (local govt pension scheme). They told me that the AVC sum is added to the x 20 calculation + the normal 3/80ths lump sum. This TOTAL figure is the sum from which the 25% tax free lump sum is calculated. If your AVC is equal to the 25% figure you effectively have got tax relief on the way in and tax relief on the way out and tax free growth - a winner in my opinion.

The question I haven't had answered yet is what happens if the AVC is greater than the 25% figure. I suspect you can buy extra pension provision or possibly take it as taxed cash but am waiting to hear the answer.

HTH

dunstonh

Do you mean that they don't have to change from the 3/80ths or 2.25 times figures at all? Or is there a date by which they have to sort it all out? We are really confused now as all the stuff we read about "A" day (is that what it was called?) was saying there would be major changes.

There is a single line in the legislation which gives occupational schemes a let off. The line being "if the scheme allows". So until or unless schemes are amended, many of the new options available will not be on offer. Some of them may never be on offer.

The changes require the trustees of the occupational scheme to put in rule alterations and that requires a lot of work and costs money as you will be involving the actuaries again. For example, I have an article in front of me dated April 06 that says that changes to the Teachers Pension scheme are due around Summer 2007.

Research from Prudential shows that big and medium sized companies were unprepared for A day. Public sector schemes, including LGPS, are among the least well prepared.

jennifernil

One other question................

Is the giving up £1 of pension for every £12 of lump sum a fairly standard amount?

We have heard that some who are already pensioners in the Scheme had to give up £1 for every £10. Is this something we could negotiate on?