trivial pension info

coxwell

I'm trying to understand the pension minefield.
A friend of mine has 4 small pension pots that in total will give an annual pension of £1600 .
In order to calculate their total worth to establish what to do. Do we use transfer value, trivial commutation value or what.
The four different companies that manage the funds all have different ways of showing the values. What a mess!

molerat

You need all the different values to decide what each option would achieve. For instance transferring to another pension would give you £x pa, trivial commutation would give you £y in your pocket and leaving it where it is would give you £z pa.

coxwell

hi thanks for reply,
but which figure do you use to calculate the value of a trivial pension?

xylophone

http://www.pensionsadvisoryservice.org.uk/about-pensions/retirement-choices/the-right-choice-for-me/taking-a-small-pension-as-a-cash-lump-sum

http://www.scottishwidows.co.uk/extranet/literature/doc/FP0473

coxwell

thanks guys but I must be thick or something.
I have 4 different pension illustrations.
the first one shows 5 options,
option 1. full pension - shows annual value
option 2. max tax free cash with reduced pension - shows value
option 3. alternative cash option if lower lump sum required.
option 4. transfer of plan benefits - no values but have to prove independant advice from authorised ifa before transfer statement available.
option 5. Trivial commutation - estimated cash sum if eligble for trivial commutation. shows value

so which figure do I use in the eligble for trivial commutation calculation?

dunstonh

Triviality only applies to defined benefit schemes and to some extent schemes with safeguarded benefits. It does not apply to money purchase schemes any more.

option 4. transfer of plan benefits - no values but have to prove independant advice from authorised ifa before transfer statement available.

This and the mention of triviality suggests it is a defined benefit scheme.

The £1600 p.a. will be paid on an increasing basis normally. is that before or after the payment of the tax free cash?
What is the trivial value the have mentioned?

coxwell

thanks , this is only one of the statements.
the pension is only £637 per annum but the trivial commutation is£12031.
I am trying to calculate the overall commutation value for all 4 pensions but each statement is different, so which figure is used in the calculation???

xylophone

http://www.pensionsadvisoryservice.org.uk/content/publications-files/uploads/Taking_small_pensions_Detailed_SPOT008_V1.5.pdf

Does the above help at all?

jamesd

coxwell wrote: »

thanks , this is only one of the statements.
the pension is only £637 per annum but the trivial commutation is£12031.
I am trying to calculate the overall commutation value for all 4 pensions but each statement is different, so which figure is used in the calculation???

The calculation rules and situation behind the calculation will also be different for each so you really do have to check with each. There are two broad types:

1. Defined benefit (DB), like final or average salary. For these there should be a "CETV", the cash-equivalent transfer value. This is what would be paid into a personal pension if a transfer to a personal pension was done and it's the amount that could then be taken out of that personal pension. Defined benefit schemes still have a triviality process but you should always compare any triviality or lump sum payment offers with the same scheme's CETV because they can often be much lower than the CETV, making the transfer route the way to get the most money out.

2. Defined contribution (DC) sometimes called money purchase or personal pension. With these there's a real pot of money invested for the individual and usually there will be statements of how the money is invested. For these, the current value of the investments is the real value that can be taken out but there are some enhancements that I'll mention next.

For the defined contribution type there can be valuable extra benefits attached:

A. Guaranteed Minimum Pension (GMP) which is a guarantee to pay at least a minimum income level regardless of whether the investments did badly or not. This is valuable because a GMP will normally buy much more income than spending the pot to buy an annuity would pay. So taking the GMP would be better than taking the cash, typically. GMP might also beat deferring the state pension in terms of income increase per Pound of money spent buying it. The defined benefit type can also have GMP but it's normally just built in not something you have to ask about, so not something to worry about in that case. So you should ask about GMP before deciding what to do. GMP is usually encountered for pension pots that people have as a result of contracting out of SERPs back in the 80s or 90s.

B. Guaranteed Annuity Rate (GAR). This is a guarantee to pay an annuity income level per Pound spent that is typically far higher than current open market rates, perhaps twice as high. It was common on pensions started before around the year 2000, when it almost completely stopped being available on new plans. But the old ones still have it. As with GMP the GAR can make the income much more valuable than the lump sum that doesn't get the boost from the guarantee. A GAR might also beat using state pension deferral to increase income, the two need to be compared.

C. Final/terminal bonus, a feature of some older pensions that were invested in with profits plans, unlikely to be present on any started after around the year 2000. Can be a large part of the true value of the pension and can make withdrawing money before the pension age given a very expensive mistake because the bonus would be lost.

Unfortunately you really do have to check for each pension what type it is and whether it has any of those features before it's possible to make a really good decision about the best thing to do. Bit of a pain but the values are high enough if present that it is worth checking.

jamesd

A commutation rate is something that only a defined benefit pension has and it is almost always going to be less than the CETV. If you see a mention of commutation rate in a quote, that's a sign of a deal that you should probably not take, get the CETV instead. The CETV could be twice as high or even more. I've seen commutation rates as low as around 8:1 and as high as 28:1 and a CETV would be closer to that 28:1. Big difference between 28 Pounds of lump sum per Pound of income and only 8.

jamesd

What happens with a pension of low value depends on whether it's DB or DC.

First though, there's something called the money purchase annual allowance (MPAA) that is normally £40,000 a year of contributions that a person can make a year to a personal pension (and it's also limited by earned income). The MPAA is reduced to £10,000 if a person takes any of the taxable 75% of a personal pension or a defined benefit one that has been transferred out.

If it is DC, there is something called the "small pots rule". This allows taking the whole of a pot from the pension without the reduction in the MPAA. It's still 25% tax free and 75% taxable, just no penalty on top of the tax. There used to be triviality but it was abolished for this type last year and changed to this better deal. The small pots rule allows taking of up to three pots per lifetime and each of them can have a value of up to £10,000. If the value is above that the small pots rule can't be used but instead the pension freedoms rule with MPAA reduction can be used to still take the money. Pensions can be transferred first, so if there are two £2k pots it would be a good move to combine them to use only one of the three limit.

If it's DB there is still triviality. The limit here is total DB benefit value across all DB pensions of no more than £30,000. The value is calculated as the income that would be paid multiplied by 20. Unlike small pots there is no per pension limit and a single one could be worth say 29k with another 1k and it'd be fine.

A single person can use both the triviality and small pots approaches, so potentially as much as £60,000 combined.

For DC then there's the pension freedom rules that allow taking of any amount out of a pot at any time.

For all of these there is taxable 75% that is treated as income for income tax in the year in which the 75% is taken. This can make it a good tax saving move to do it over two or more tax years.