Two real pension eye openers

kidmugsy

asavory wrote: »

I'm not surprised most of you don't believe me. In the meantime here's a Sunday Times article talking about the Avon Pension Scheme: http /cda.thesundaytimes.co.uk/sto/business/money/pensions/article1438753.ece

Well, stone the crows! My apologies for being perhaps too sceptical. But journalists: I'd still like to see the wording.

I must say I squirm when someone caught out in what may be misbehaviour defends himself by pointing out that it's not actually illegal. Trustees are meant to consider the welfare of members, not just avoid breaking the law. And I don't like this: "a significant proportion of members will ignore or fail to respond to communications, which can make it difficult to administer defined benefit schemes cost effectively.” I don't like it because I see an easy (partial) solution. In my experience, every now and then a pension scheme will write to you asking you to confirm that you are still alive. Surely they could include the offer of a lump sum in the same letter, a letter that I'll bet pensioners do tend to reply to.


The paper does answer one of my questions: "However, as the lump sum payment is taxable, it could land members with a bill from the Revenue or push them into a higher tax band."

xylophone

Two questions for anyone who might know: (i) How would the lump sum be taxed? (ii) How would the lump sum affect state doles? For example, would receiving the lump sum mean "she would receive additional pension credit of...£300"?

http://www.scottishlife.co.uk/scotlife/Web/Site/Adviser/TechnicalCentralArea/FAQsArea/2014_Budget.asp


"A: The tax treatment of lump sums taken under the small pot and triviality rules remains unchanged.
25% of the lump sum is payable tax-free. The rest is payable at the member’s marginal rate of income tax. This means that if they currently pay tax at the 20% basic rate tax then 75% of the lump sum will be subject to this tax, unless the lump sum payment pushes them into a higher tax bracket. For example, if somebody has a lump sum of £10,000 then they will receive £2,500 tax-free and £7,500 will be subject to 20% tax. This means that, in this example, in total they will be entitled to a lump of £2,500 plus £6,000 after tax, being a total of £8,500.
The provider or scheme trustee is required to apply tax at the basic rate regardless of the amount of tax the member is actually liable for. This means that the amount of tax the provider or scheme trustee deducts may be greater or less than the amount which should apply to the member. If the member thinks that they have paid too much or not enough tax then they will need to discuss this with HMRC."

Re pension credit http://www.ageuk.org.uk/Documents/EN-GB/Factsheets/FS48_Pension_Credit_fcs.pdf?dtrk=true

asavory

I don't have the letters to hand at the moment. I'll try to get hold of them later.

I contacted Mercer regarding my mother's pension. Here is some of the transcript, which I recorded:

Q: Why does my mother need to justify why she wants to continue receiving her pension?
A: Because there was meant to be an automated payment, and the Trustees want to know why she has refused.

Q: This is a company pension, which was meant to be a pension for life, correct?
A: What we are doing now is an automatic payment which is a one-off trivial commutation lump sum and then the pension would stop.

Q: And what if she doesn’t want to do that?
A: She would need to write back to us, asking, and confirming the reasons why.

Q: And if she doesn’t?
A: I’ll have to check…most likely your mother will just receive the one-off lump sum. It’s in your best interests if she doesn’t want the lump sum to send the reasons why.

Q: Who decides whether the reasons are appropriate?
A: The Trustees.

Q: So they have total control over whether she continues to receive a pension or not.
A: That’s right, it’s written in the Trust rules that they can automatically make a one-off lump sum payment instead of continuing with the pension and we don’t need the member’s consent for that.

Q: When did those rules change?
A: They never changed.

Q: Those were the rules in the 70s and 80s?
A: The rules over commutation can change but the Trustee rules are the same.

Q: Is this lawful?
A: Well basically the HMRC decides the limit for what they think is a small amount and that is what you can have as a trivial commutation lump sum.

Q: That (limit) was for the pension holder to decide, not the Trustees.
A: The Trustees can decide whether to make automatic or not, and they decided to make these ones automatic.

xylophone

Ask in writing for a copy of the rules of the scheme - require the Trustees to point to the exact provisions that permit them to make changes to a pension in payment.

Provide all the information requested by the Trustees - you wish to show that you have been reasonable ( despite the fact that you'd like to spit in their beer.......:))

See my post above concerning the Duty of Trustees (from the Pensions Regulator)- no doubt you will have noted the comment from the DWP.

Have you contacted your MP?

kidmugsy

asavory wrote: »

A: The Trustees can decide whether to make automatic or not, and they decided to make these ones automatic.

So the !!!!!!s did have discretion, and opted for the policy likeliest to upset the very old. How shabby.

It's like old-fashioned "inertia selling" which was (was it?) banned.


Anyway, you now know one reason she can use: because she'd lose some of it to tax.


P.S. The stupidity of the censor on this site makes my language seem much fouler than it really is.

patanne

Well total layperson here, but this looks like something way less than ethical. Certainly miss-something (although not missSELLING obviously). If this was looked at by any form of oversight they should be !!!!!!!!!!!.

Basically they should be ashamed of themselves, but I guess if it is more in their pockets then I guess they won't be. They bring the pension market (sic) into disrepute.

asavory

kidmugsy wrote: »

Anyway, you now know one reason she can use: because she'd lose some of it to tax.

Already sent:

Further to your letter dated 21st October I would like to decline the offer of exchanging my pensions for a trivial commutation lump sum. My reasons are as follows:

• The payment of the full lump sum of both my pension and my deceased husband’s pension would affect my income for the tax year sufficiently to result in a notable proportion of the lump sum being taxed.
• Savings I have would mean that I would not qualify for pension credit or council tax rebate as a result of losing my pension income, even though I would be financially worse off without the pensions (income from lump sum estimated to be only £120 per month).
• I am in relative good health and would be financially worse off in the long term without a pension.

Teaandscones

I wouldn't want to be writing the professional indemnity insurance for the trustees or their advisers.

zagfles

asavory wrote: »

While investigating the effect of this on my mother's finances, I discovered something even more shocking. The company pensions are worth about £200 to my mother. If she didn't have this pension (and no savings) she would receive additional pension credit of...£300. Yes, that's right. If she had spent all her money and neither of my parents contributed to a pension scheme she would actually be better off! Incredible. Even if she had no savings the pension credit would equal the £200, the value of her company pension (the current rules heavily penalise anyone with savings - they want you to spend it!).

I think you've misunderstood - pension credit doesn't work like that. AIRI combined with the saving credits it's effectively a 40% tax on any additional pension above the full basic state pension. If she doesn't get the full state pension then it's 100% up to that level then 40%.

Basically you should never be worse off having a private pension (except maybe accounting for passported benefits eg dentist). If she'd get £300 PC without the private scheme then she should get at least £100 PC with a £200 private pension. So maybe she should be claiming PC now?

There's a PC calculator here: https://www.gov.uk/pension-credit-calculator

asavory

zagfles wrote: »

I think you've misunderstood - pension credit doesn't work like that.

Basically you should never be worse off having a private pension (except maybe accounting for passported benefits eg dentist). If she'd get £300 PC without the private scheme then she should get at least £100 PC with a £200 private pension. So maybe she should be claiming PC now?

There's a PC calculator here: https://www.gov.uk/pension-credit-calculator

There's one thing you are not factoring in - she has savings. Without savings she would get about £100 pensions credit per month, so unless she withdraws that amount from her savings (ignoring paltry interest) each month she is worse off. Ignoring savings you are right - you should never be worse off with a private pension, you might not be better off either. Arguably you are worse off through paying into it all your working life.