how do they work out TFLS with a DB pension

Legacy_user

Ive got a DB pension with my company that kindly decided to yank from under our feet some 11 years ago and we went into a DC one. Ive got another 10 years before im 65 and The DB pension slightly increases or rather the forecast does each year. So how do they work out 25% TFLS if i want to take it when im 65. Obviously a "pot" isnt there so to speak so how do they work out a 25% of fresh air so to speak.Also is the figure affected by the fund level as a whole as as it stands the fund is only at 73% funding and a 18 million blackhole in it which the company are putting in £3 million a year but it seems that this £3 million is basically took by those already getting their pension as the funding level has been at the 70% level now for years.

Marcon

Start with the rules of the scheme: they will dictate whether you can take any tax free cash and if so, whether you can take the maximum permitted by legislation, or a lower level imposed by the scheme rules. Taking tax free cash may be subject to trustee consent and could, if the funding level is very weak, be refused/restricted - but that is quite unusual, so don't panic unduly if you are keen to take maximum tax free cash.

As for how it is worked out...the scheme won't be able to give you any sort of realistic estimate until much nearer the time you want to draw your benefits. It's complicated! See https://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/06/what-is-commutation/

Silvertabby

It depends on the scheme rules - not all allow commutation - and the commutation factor the scheme uses.

The notional value of a DB scheme for 25% tax free purposes is 20 x annual pension plus 1 x any automatic lump sum X 25% = the maximum tax free cash allowed by HMRC.

However, the commutation rate in use could then make a big difference.

E.G. £10K annual pension plus £30K automatic lump sum =

20 x £10K = £200K plus

1 x £30K = £30K

= £230K X 25% = £57,500 maximum tax free cash allowed by HMRC.

Then we factor in the commutation rate.... Some private schemes offer quite generous commutation factors, but others - such as the public sector - not so much.

For example, using the same pension of £10K annual pension and £30K automatic lump sum, and the public sector commutation factor of 1:12, the maximum tax free cash/reduced pension would be £53,571.43 cash, £8,036.71 annual pension.