Barclays Final Salary pension GMP/Excess revaluation & Anti-franking

xylophone

using the income

But there doesn't seem to be any rule against recycling pension income back into a pension? (See final page of your link.)

That said, one does rather get the impression that Humpty Dumpty like ( "When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean—neither more nor less." ) recycling means whatever HMRC says it means....

MikeFloutier

Ok, thanks Xylophone, I've read the Scottish Widows link again a few times and it does appear that the main thing is that it's not an abuse of the system.

Considering how little I've made in the way of contributions I think, on balance, that it's reasonable for me to reinvest my pension income in this way.

What I think I'll probably do is to restrict it to 30% of my lump sum for the first two years.

The remaining income I'll keep in my Offset mortgage current account (worth 4% net) along with the lump sum.

Then after two years I'll increase my contributions to the full amount of the pension income.

Then after three years I'll feel free to increase my contributions as I please.

SnowMan

MikeFloutier wrote: »

and yes it is the case with the Barclays Scheme that the widows' benefits remain the same regardless of the Lump Sum.

Regarding the commutation factor, with this Scheme it is slightly over 18 which I believe is reasonable.

That isn't the worse conversion rate I've seen but you still need to crunch the numbers especially if cash taken is used to effectively buy more pension at some point. To state the obvious there is no point given up pension for cash to buy a pension that is less than the pension foregone.

Worth looking at the annuity calculator on the Money Advice Service website to work out the 'cost neutral' conversion rate.

http://pluto.moneyadviceservice.org.uk/annuities

To compare with the scheme rate you need to allow for a single life annuity (probably with 5 year guaranteed payment if that is what the scheme provides although it won't make a lot of difference to the numbers) and choose an increase rate that reflects the increases in payment to the excess which is where the cash is coming from (noting that you won't be able to mirror the exact scheme increases and the increases from 60 to 65 are taken away at 65 so some tweeking is required).

You also need to allow for tax. The pension from the scheme will be taxed in accordance with your tax rate. The scheme lump sum under the commutation option is tax free but any subsequent income from it may be taxed depending on what you do with it. Obviously indirectly channeling the lump sum back into a pension changes the tax calculation.


It is important as a first step in planning your retirement to work out your income and expenditure position.

Look at all the income you and your wife have from your Barclays pension, state pensions, other pensions and savings and investments.

It is important to work out what your expenditure in retirement is likely to be. You need to analyse current expenditure (tedious as that might sound) and adjust for differences between expenditure now and expenditure in retirement.

You need to allow for inflation if it is likely to erode any of this income, for example adjust for pensions that aren't inflation linked so will lose value over the hopefully long period of retirement.

You also need to look at the timing of your income and expenditure cashflows. If you expect to spend more money in the early part of your retirement then you might need that income earlier rather than later and that might affect the decision on whether to take cash.

Until you have done this income and expenditure analysis it is hard to plan. Ideally you want guaranteed inflation linked income to cover your expected expenditure. You then know you can be more flexible with any savings and investments on top of this. In reality life isn't that simple but analysing how far away from that 'ideal' position you are helps you plan.

Make sure you are utilising both of your personal allowances. For example if your wife is going to be a non taxpayer then moving savings, investments and future pension contributions into her name can make sense.

MikeFloutier

Many thanks SnowMan, that is so helpful. Plenty to think about whilst I'm waiting to hear back from TW and TPAS.

MikeFloutier

Actually I re-checked the commutation factors because I remembered that the lump sum is made up of two components; a) The total value of the units invested in by my Barclays AVCs, and b) The remainder (up to the max of 25%) from the regular Barclays pension.

If I take around 12.5% as a lump sum, as I plan, half will be from the AVCs and the other half from the regular part.

As I said, the regular part has a factor of 18 but the AVC portion's factor is much higher at nearly 27.

I'm not sure why the factor is so much higher on the AVC portion. I got the Pluto quotes you suggested and this seemed to equate to a factor of 45.

Anyway, bearing mind my proposed average factor is 22.5 and I want the money (far more noble reasons than Xylophone suggests ) and the loss of income is relatively small I think I'll probably go for it.

xylophone

(far more noble reasons than Xylophone suggests )

I expect that the Prodigal Son claimed that he was supporting the local economy....;)

MikeFloutier

Haha, ok maybe not all that noble

Ribin

Having just read through this topic, I just thought I would say that Barclays are not the only ones that B****er you around. I have a NatWest pension and after numerous questions have discovered that at age 57 my pension will actually be worth less the longer I leave it due to some obscure rules hidden well in the T & C. Don't want to hijack your thread and will post separately, but these Pension Funds certainly do not look after their customers. Good luck with your quest and decisions

MikeFloutier

Well you are in good hands here Ribin; as you can see!

SnowMan

MikeFloutier wrote: »

Actually I re-checked the commutation factors because I remembered that the lump sum is made up of two components; a) The total value of the units invested in by my Barclays AVCs, and b) The remainder (up to the max of 25%) from the regular Barclays pension.

If I take around 12.5% as a lump sum, as I plan, half will be from the AVCs and the other half from the regular part.

As I said, the regular part has a factor of 18 but the AVC portion's factor is much higher at nearly 27.

I'm not sure why the factor is so much higher on the AVC portion. I got the Pluto quotes you suggested and this seemed to equate to a factor of 45.

Anyway, bearing mind my proposed average factor is 22.5 and I want the money (far more noble reasons than Xylophone suggests ) and the loss of income is relatively small I think I'll probably go for it.

From the scheme perspective the cost neutral conversion rates (commutation factors) I came up with at age 60 from the Money Advice Service calculator (asssuming you don't have reduced life expectancy) were about

18.3 with 0% increases in payment and
27.6 with 3% increases in payment

Tweeking the latter gives you a factor of about 24.1 for a 3% increase with 5 years of 3% increases removed at age 65 (analogous to what the scheme does by franking away increases in payment between 60 and 65).

You then have to factor in from your perspective the tax advantages of taking some of your scheme pension as cash.

For example if a) you will be a basic rate taxpayer before this Barclays pension is allowed for and b) the Barclays pension keeps you within basic rate and c) you are able to earn gross interest on the lump sum taken (e.g. through an ISA) then you can roughly speaking divide the scheme commutation factors by 0.8 as the tax advantage is essentially basic rate tax.

So the scheme commutation factor of 18 when you adjust it for the tax advantage of the lump sum becomes 22.5 (= 18/0.8 where 18 is the factor the scheme actually use), for purposes of comparing with the cost neutral rate, on the assumptions above of course. So you might be comparing 22.5 with 24.1 if the scheme gives 3% per annum increases.


In terms of the AVCs, then it sounds like they can be converted back to pension at genuine cost neutral rates if that is where the 27 comes from (rather than the scheme commutation rate) so it would be logical to take those as part of your total cash. Taking the cash solely from commuting your scheme pension and converting your AVCs to pension is numerically a worse option.

Even if you were intending to go for pension only (including AVCs), which you aren't, you might still be still better to take the AVCs as cash and either buy a purchased life annuity with the lump sum, or try and recycle it into a pension within the recycling rules

Is your factor of 27 the rate at which your AVC fund would be converted back to a pension with an increase at the scheme increase in payment rate? If so that would indicate the commutation factor for your main pension of 18 is not cost neutral but the scheme makes a 'profit' on cash commuted.


Of course you may well have reasons to take the cash despite the rate not being cost neutral, and I am not trying to dissuade you from doing this at all, only trying to help with understanding the decision.


What is the guaranteed rate of increase in payment that the scheme provides by the way (and is there any prospect of discretionary increases - I presume not)?