annual increases to defined benefit pensions

etienneg

A DB pension scheme may have different rules for how much increase is applied for pensionable service in different time periods. What then happens if you take the 25% tax-free lump sum? I realize that the remaining pension will not be exactly 75% of the full amount even at the beginning. But my question is about how the annual increases work.

To take a very simple (and entirely hypothetical) example. Suppose the pensionable service was 10 years on which no increases were payable followed by 30 years where 3% applied. Would the lump sum 'wipe out' the first 10 years, so the remaining pension increased at 3%? Or would it be calculated proportionally, so that 7.5 years worth had no increases and 22.5 years worth increased at 3%? Or something else? Or is it up to the scheme to decide?

Terron

Different schemes have different rules. I have one where "annual increases" are entirely at the discretion of the trustees and they have only given two 1% rises in the last 16 years.

Another is cover by the 1997 rules change that requires pensions in payment to be increased in line with inflation.

Thrugelmir

Does the DB scheme allow you to take a 25% lump sum. That's the first question that you need to obtain the answer too. Otherwise the actual question is redundant.

Dox

I've never seen a scheme where you could choose which 'years' of your pension to commute. If the scheme's rules enabled a member to take tax free cash and they did so, the pension given up in exchange for the cash would be spread evenly across their whole service.

Sentence deleted because, as others have pointed out, it's nonsense!

hyubh

Dox wrote: »

Normally increases to pensions in payment are based on the date on which someone leaves pensionable service, not when the pension was built up.

Not at all - it wouldn't be out of the ordinary to have (say) pre-97, 97-05 and post-05 splits on a private sector DB pension in payment for someone who had been an active member from the mid-90s to 2010 or whatever.

That said, I agree with your main point (viz., commutation concerning particular years).

Hussel

That’s not right, Dox. Pension accrued in different periods receives different increases. Pension accrued after 1997 had to be increased in payment by inflation up to 5% then it changed to up to 2.5% from 2005. Before 1997 there were no minimum increases except on GMP accrued in a certain period. So increases are generally all about when the pension accrued, not when you left service. When you left service will just determine how many different increases you receive.

Generally pension funds will have different commutation rates for pensions with different increases in order to make it fair. Which pension they commute should therefore not matter from a value perspective although commutation factors are not regularly updated unless there are large changes in market interest rates and/or inflation expectations. As you say, it is common to commute pro rata across the various bits of pension but I’ve seen other methods used. Another common one was to use AVCs first as then the member benefits from the guaranteed DB pension increases and doesn’t have to buy an annuity with the AVCs.

Dox

hyubh wrote: »

Not at all - it wouldn't be out of the ordinary to have (say) pre-97, 97-05 and post-05 splits on a private sector DB pension in payment for someone who had been an active member from the mid-90s to 2010 or whatever.

That said, I agree with your main point (viz., commutation concerning particular years).

You're right, I'm wrong - thank you and apologies! Brain on vacation and thinking about revaluation in deferment, which is an entirely different thing....